Munjal Showa (MSL) is a leading shock absorber (including front forks, struts) manufacturer domestically with a significant market share in the oligopolistic industry. It can be seen as a proxy play on volume & demand recovery at Hero MotoCorp (HMCL), with HMCL accounting for ~80% of its total sales (FY20). Part of the Hero Group (Munjal family), MSL was established in 1985 in technical collaboration with Showa Corporation (Japan), which also holds a 26% stake in the company.
Anchor client HMCL leading recovery post Covid-19
MSL, being part of Hero Group, derives majority of its revenue from 2-W market leader HMCL (client mix - HMCL ~78%, HMSI ~7-8%, MSIL ~8%, Honda Cars ~5%). MSL commands ~95% wallet share at HMCL, ~25% of wallet share at MSIL, 100% of wallet share at Honda Cars. Our analysis of Vahan database shows 2-W segment clocked ~60% of pre-Covid retail sales in June - with HMCL sales back to ~60%+ of pre Covid levels (market share at ~40% vs. its wholesale market share at ~36%). This is driven by HMCL's rural stronghold (~50% of sales) & preference for motorcycles for social distancing needs. MSL by virtue of this trend should benefit in the near term.
Large cash balance, high dividend yield give margin of safety
Munjal Showa has a debt-free, cash rich balance sheet (cash & equivalents ~Rs. 300 crore i.e. ~50% of net worth, ~70% of present market cap) with consistent cash flow generation track record (present CFO & FCF yield at ~15% & ~10%, respectively) and healthy dividend payout (dividend yield ~4%). It is currently trading at inexpensive valuations (~10x P/E, ~2x EV/EBITDA, ~0.65x P/B) despite double digit RoIC.
Valuation & Outlook
We expect base case valuations to prevail at MSL and assign BUY rating, valuing the stock at Rs. 130 i.e. 4x EV/EBITDA with implied P/B at 0.8x FY20 numbers. However, we do not view MSL as a long term portfolio play, given the slow pace of client additions, muted margin profile vs. peers and parallel existence of Showa Corporation in Indian as well as exports markets.
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Shares of MUNJAL SHOWA LTD. was last trading in BSE at Rs.100.05 as compared to the previous close of Rs. 103.05. The total number of shares traded during the day was 3815 in over 236 trades.
The stock hit an intraday high of Rs. 104.1 and intraday low of 99.5. The net turnover during the day was Rs. 385330.