feb 3, 2017 pick of the month munjal showa limited...

OVERVIEW: Industry: The automotive component industry is one of the most important sectors of Indian economy, proving to be a major source for earning foreign exchange for the country. Moreover, it contributes significantly to the Indian GDP (nearly 7.1%) while employing around 19-20mn people directly or indirectly. There are more than 400 major players across the country, where South Indian companies or manufacturers are currently acting as a major hub for the Indian automotive industry.

The automotive industry can be easily segmented in to organized and un-organized sector, where the organized segment accounts for 80% of the market. NOVONOUS estimates that the organized auto component industry in India is expected to grow at a CAGR of 12.5% by 2020. Many of these organized auto component manufacturers already have a foreign collaborator or associate automotive vehicle manufacturers (AVM) to supply OEMs. The industry caters to three major categories i.e. (a) OEMs, (b) the replacement market and (c) the export market.

As per ETAuto, the global auto component industry is estimated to be around USD1.75trillion, where Indian auto components industry’s revenue stands at around USD40bn which equals to around 2.3% of the total Indian GDP contributing USD11bn of exports. According to Automotive Mission Plan (AMP) 2026, it is estimated that the market size and exports will grow by five times which will require an investment of around USD25bn to USD30bn. This clearly shows that the market has tremendous opportunities along with many challenges at the same time.

Researchers at Deloitte have indicated that India is poised to become the third largest market for automobiles by 2020. In addition to this, they have also indicated, India will emerge as a major automobile manufacturing hub in years to come. Moreover, India stands as the seventh-largest automobiles producer in the world. The Automotive Mission Plan 2026 of India is targeting revenues of approximately USD200bn by 2026 where nearly USD70bn would be contributed by component exports.

In 2015, the Indian auto component industry was dominated by engine, suspension and braking parts segment. The leading vendors in the market include Bharat Forge, Bosch India, Minda industries, Motherson, TVS etc. Some of the other prominent vendors in the market include Amara Raja, Exide Industries, Federal Mogul, Gabriel India, JBM Auto, Munjal Showa, JMT Auto, Precision Camshafts, Sona Group, Suprajit Engineering, and WABCO India.

Both Indian Credit Ratings agency (ICRA) and Automotive Component Manufacturers Association of India (ACMA) are expecting a growth of 8-10% in the Indian auto component industry. ICRA believes the growth in the auto components industry will be higher than the underlying auto motive industry growth and the implementation of the 7th Pay Commission will support urban as well as the semi-urban segments. As per some research papers by ACMA and newspaper articles, the turnover of the auto component industry has increased by approximately 8.8% to USD39bn for the period April 2015 to March 2016, exports have edged up by 3.5% i.e. USD11.2bn from USD10.8bn, while imports have increased by 9.3% to USD13.8bn in 2015-16. The after-sales market sales have also been improving at a robust10-12%.

Analysts at Technavio predict a growth of around 9% in the global automotive advanced suspension control system by 2020. This growth will be propelled by the requirement of electronically controlled air suspension system which facilitate a safe driving experience. These suspension systems are a blend of mechanical as well as hydraulic systems, which help manage oil flow through the absorbers. In years to come, the demand for automated premium luxury vehicles is bound to increase in majority countries of APAC. Additionally, in the long run, manufacturers will also focus on semi-active and active suspension systems which provides better and safer suspension systems at low cost of development of these systems aided with extensive use of magneto-rheological (MR fluid) which provides cost advantage to semi-active suspension systems. All these factors will further act as major triggers for growth of this market.

CMP: Rs. 191 TARGET PRICE: Rs. 250 TIME : 12 months

SNAPSHOT

52 week H / L Mcap (INR mn)

255 / 150 7,640

Face value: 2

BSE Code NSE CODE

520043 MUNJALSHOW

Annual Performance

(Rs mn) FY14 FY15 FY16 FY17E

Sales (Net) 15979.7 16429.7 15018.4 15769.3

EBITDA 1052.2 1266.0 1120.8 1182.7

EBITDA (%) 6.6 7.7 7.5 7.5

Other Income 60.8 81.5 51.9 51.9

Interest 27.0 4.5 1.2 1.2

Depreciation 284.1 286.7 293.0 292.1

PBT 801.9 1056.3 878.5 941.3

PAT 697.0 756.3 611.5 658.9

Equity 80.0 80.0 80.0 80.0

EPS (INR) 17.4 18.9 15.3 16.5

Ratio Analysis

Parameters (Rs mn) FY14 FY15 FY16 FY17E

EV/EBITDA (x) 7.1 6.0 6.4 5.8

EV/Net Sales (x) 0.5 0.5 0.5 0.5

M Cap/Sales (x) 0.5 0.5 0.5 0.5

M Cap/EBITDA (x) 7.3 6.0 6.5 5.8

Debt/Equity (x) 0.0 0.0 0.0 0.0

ROCE (%) 13.8 16.5 14.2 15.4

Price/Book Value (x) 2.1 1.9 1.6 1.5

P/E (x) 11.0 10.1 12.5 11.6

Share Holding Pattern as on 31st Dec 2016

Parameters No of Shares %

Promoters 26,004,000 65.0

Institutions 1,551,152 3.88

Public 12,439,848 31.1

TOTAL 39,995,000 100

Quarterly Performance

Parameters (Rs mn) Dec-15 Mar-16 June-16 Sept-16

Sales (Net) 3,665.9 3,753.6 3,855.1 3,910.7

EBITDA 258.0 269.1 263.5 315.5

EBITDA ( %) 7.0 7.2 6.8 8.1

Other Income 17.1 7.2 16.2 10.0

Interest 0.4 0.2 0.1 0.4

Depreciation 75.1 74.6 74.1 69.8

PAT 144.9 139.0 145.4 177.3

Equity ( Rs mn) 80.0 80.0 80.0 80.0

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Note: All the data is calculated as per Market Price on 2nd Feb 2017. Please Turn Over

Feb 3, 2017 PICK OF THE MONTH VOL-3, NO-3

Munjal Showa Limited BUY

Various market estimates have indicated that the exports from India to European, North American and Asian countries could account for nearly 25-26% of the total market by 2021. Since there is an influx of demand, many auto makers have already been investing in various segments. According to DIPP, FDI worth USD 15bn has been witnessed during the period April 2000 to December 2015. Factors such as improved consumer sentiments, Indian demography (which is aptly placed), increasing working age population with rising income, increasing and easier access to finance, rural demand for two wheelers, lesser wage costs in India as compared to the world average wages, India - one of the lowest cost producer of steel in the world, increasing investments from foreign manufacturers in order to sweep the advantage of low cost of production in India, already existing world class multinational automotive plants, growing electronic content per vehicle, make in India project and push on increased localization by OEMs , increasing growth in the replacement market, India’s geographically location and proximity to key automotive markets like Middle East and Europe, large opportunities in Africa and Latin America export-oriented growth and the hopes of implementation of GST have induced the Indian auto component segment to continue to grow much faster than the OEM segment. The focus of majority of the companies is towards providing higher value added and world class product in order to sustain in the highly competitive market. Geographical presence and penetration will play a major role for the companies in order to outperform their peers. The entire industry is well positioned for growth which can be witnessed in terms of domestic demand as well as export opportunities. The entire concept of globalizing is bound to open new avenues for the industry while there will be a shift towards ecofriendly electric, electronic and hybrid cars. This in turn will create newer opportunities for those who intend to adapt to the change and shift in the market.




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Source: ACMA, TechSci Research

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Source: Company

About the Company: Established in 1985, Munjal Showa Limited is a product of technical and financial collaboration between Hero Group and Showa Corporation of Japan. The company designs and manufacturers shock absorbers and struts for leading two-wheelers and four-wheelers where the primary products are front forks, shock absorbers, struts, gas springs and window balancers etc. Nearly 95% of company revenues come from the two-wheeler industry, out of which Hero Honda alone accounts for 85%. MSL is an almost debt- free company. MSL is more or less, a customer focused organization. The list of some of the prestigious associations include: • Honda (Honda Motorcycle Scooter India Pvt Ltd) • Maruti Suzuki (Maruti Suzuki India Ltd) • Yamaha (India Yamaha Motors Pvt Ltd) • Hero (Hero MotoCorp Ltd) Honda (Honda Cars India Ltd) The company is promoted by Mr. Yogesh Chander Munjal and family. Mr. Munjal has an affiliation with some of the leading associations like Confederation of Indian Industry (CII), Automotive Component Association of India, Electronic Research and Development Institute, Indian National Suggestion Scheme’s Association, All India management Institute and National Safety Council and many more. MSL has three manufacturing locations i.e. two in the state of Haryana and one in the state of Uttarakhand. These units are located at Gurgaon, Manesar and Haridwar.

INVESTMENT RATIONALE

(A) Company profile: Based in Japan, Showa Corporation is a manufacturer of high-performance automotive, motorcycle and outboard suspension systems. Founded in 1938 as Showa Aircraft Precision Works which was banned from developing or manufacturing aircraft systems post World War II, Showa entered the car components industry. Since the company already had the experience of developing specialist suspension products (due to its aircraft knowledge), the company developed suspension products for motorcycles which was made by Honda. The relationship between Showa and Honda was strengthened over the years, where Honda Racing Corporation accounted for more than 50% of Showa's business. In 1986 Munjal Showa Ltd, a joint venture company was established in India. (B) Shock Proof Products: Munjal Showa Limited is a reputed name in the auto ancillaries manufacturing market. MSL serves as an original equipment manufacturer to a wide range of upper-end cars and export models of Maruti Suzuki, Honda City, Kawasaki Bajaj motorcycles, Kinetic Scooters and Hero range of mini-motorcycles & mopeds and Honda Motorcycles and Scooters India (Pvt) Limited. The products of the company can be easily classified into a single primary business segment i.e. Shock Absorber. There are many variants of shock absorbers like Front Forks, Rear Cushions, Struts and Gas Spring, Rear Door Lifters etc. Of the total turnover of the company, shock absorbers occupy nearly 84.65%, the segment for struts comprises of nearly 11.45% while the rest is occupied by other components segment. Munjal Showa Limited is one of the largest suppliers of shock absorbers to some of the major and esteemed auto giants in India, Japan, Germany, United States and UK. The products offered by the company are amongst the highest standards of quality, safety, comfort and dependability. These are QS9000, ISO14001 and ISO9001 compliant. The company is powered by a team of experienced personnel from Showa, Japan, who support and monitor the production of virtually zero-defect products. The manufacturing methods at Munjal are under constant upgradation, modification and improvement in order to realize higher productivity. The company uses the Japanese system of encompassing 5S, 3G, 3K, 3M, in the work culture. Thus, the use of advanced technology at its ultra-modern facilities coupled with Japanese work culture contributes to the outstanding growth in the company.




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Source: Company

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INVESTMENT RATIONALE (contd.) (B) Shock Proof Products (contd.)

(C) Technical Edge: (i) Total Productive Maintenance: By now, the technical core of the company is more or less Japanese style of manufacturing. In pursuit of the same, Munjal has started following Total Productive Maintenance (TPM) with the help of Japan Institute of Plant Maintenance (JIPM) and CII, TPM Club India. The major objectives of TPM are to increase PQCDSME viz Productivity, to improve quality, to reduce costs, to ensure in time delivery, to increase safety, to increase profitability, to build morale and to protect environment. The other objectives include procurement and installation of maintenance free plant & machinery, achieve zero defects, zero breakdown, zero losses and zero accidents. In simple words, TPM is a process to identify various types of Loss and convert them into Profit. At the heart of the technique, the main target is to improve the overall efficiency of the plant. The company has already achieved TPM Excellency Award for their plants in Gurgaon and Manesar from Japan Institute of Plant Maintenance (JIPM) and already started TPM journey for the plant at Haridwar. (ii) Lean TPM activities: The company is following a combination of TPM along with lean manufacturing system (which is also known as Value Stream Mapping). In the following technique, huge and complicated machines are converted to a leaner concept. Some of the benefits of using this concept are lesser consumption of electricity, lesser occupancy space by machines and lesser inputs required for consumables, manpower, tools, oils, lesser set-up time and cycle time. Not mention, the company has conducted Lean Manufacturing System workshop through JMAC Japan. As a result of the combination of the two techniques the company achieves higher operational efficiencies. These machines are also known as 10S Machines I.e. Safe, Simple, Small, Slim, Speed, Smart, Sturdy, Superb, Sushil and Sunder. Overall, religiously following this technique has helped the company reduce the cost of manufacturing. (D) Budget Booster: The entire industry appears to be passing through an interesting time. As per the recent announcements by the Finance Minister, the ministry is not expecting the effects of demonitisation to spread over the next fiscal year. Moreover, the Budget announcements seem to be focusing more on boosting the rural agri-economy. Lowering of tax on income lesser than Rs0.5mn is bound to bring more money in the hands of individuals. Overall, the recent auto sales numbers also indicate, the buyers for two wheelers and commercial vehicles are a little lower in the month of January but are better than the drop that one was expecting. This could normalize in near future. There appears to be some concrete steps taken towards unveiling GST. This is bound to benefit the auto components maker in distant future. With the Governments mission to make India an export hub for automobiles, there appears a vision for optimism related to the growth in the industry. With the advent of GST as well, it is expected the organized sector which accounts for nearly 15 percent of the market share will see higher growth than the unorganised sector. The sense of being cautiously bullish on the auto component industry is justifiable. Keeping in mind the volatility in the industry, there also exists a sense of optimism amidst the entire sea change in the Indian economy.




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Source: Company Source: Company

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Financials: This debt free company has had a tough time in the last two to three quarters. The long term prospects for the auto industry are bright as India could become a major hub of manufacturing for some international brands and this should benefit the auto ancillary industry hugely. The company has a good distribution policy and one expect this to become even better in future. Risks and concerns: Some of the major and immediate risks faced by the company include maintaining brand image and providing uninterrupted customer service, the requirement of skilled manpower, constant upgradation of technology, dependence on limited user segment base, unexpected increase in demand and the need to ramp-up the production in order to meet the market expectation, threat of entry of new players (increased competition), Government policies related to taxes, macro-economic factors and allied uncertainties, rural demand, unemployment and recession. Outlook and valuations: The stock is currently not on the radar of any fund manager though it has a few HNIs holding it. We could see a totally different MSL in time to come. One can safely accumulate this stock on declines if any. We initiate a Buy on the stock with a target price of Rs250 over a horizon of 12 months.




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feb 3, 2017 pick of the month munjal showa limited...

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