Munjal Showa was formed as collaboration between the Hero Group (39%) and Showa Corporation, Japan (26%). The company is the sole supplier of shock absorbers to Hero Honda Motorcycles and Honda Scooters and Motorcycles. Bulk of the company’s revenues is generated from the two-wheeler segment.
Over the years, the company has benefited from the robust growth in demand for motorcycles (33% CAGR in the last six years). Barring FY03, Hero Honda has outperformed industry growth rate in the last seven years and commands a market share of 44% in FY03. The sharp rise in motorcycle sales combined with the position as a sole supplier of shock absorbers to Hero Honda has benefited Munjal Showa immensely. Sales and net profit has grown at a CAGR of 23% and 15% in the last five years.
Apart from Hero Honda, the company also supplies shock absorbers to Honda Scooters in India. Going forward, both the aforesaid clients have big plans for India. Honda Scooters is slated to enter the fast growing motorcycle segment for which Munjal Showa has plans to supply components. With the technical agreement continuing with Honda, the Indian motorcycle major is expected to launch atleast eight new models till 2008. This will add to the volume growth.
In an effort to reduce the dependence on the two-wheeler segment, Munjal Showa will commence supply to Honda Siel Cars India for its new generation ‘City’ model. This initiative could benefit the company in the long run. In fact, based on the client list, the company expects to grow revenues by 10% in FY04.
However, we expect pressure on prices to continue in the future (3% decline in FY03). Besides, close to 30% of raw material costs are imported. While rupee has appreciated in the recent past, any adverse movement could affect margins significantly. As is evident from the historically high growth in revenues and slower profit improvement, margins will also remain under pressure.
The stock currently trades at Rs 254 implying a P/E multiple of 9.3x annualised 1QFY04 earnings. Keeping in mind the high dependence on the key majors for growth, valuations seem to reflect the near term growth prospects.
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