Buy Munjal Auto; target of Rs 92: Karvy

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Karvy Fundamental Initiation Report: Munjal Auto Industries Ltd- Strong Clientele Lays Foundation for Sustainable Growth

Abstract: Currently the fundamental growth drivers of Munjal Auto; Specialists in exhaust system manufacturing, depends on the performance of Hero MotoCorp (their group company) and the auto industry as a whole. Considering favorable rural demand and economic conditions, the revenue is expected to grow at a CAGR of 11% from FY13-17E with RoE reaching 20.3% by FY17E from the prevailing 18% in FY15. The EBITDA margins are expected to shoot by 50bps to 8.2% in FY17E from 7.7% in FY15, supported by nominal cost of production. The prevailing Net debt position is expected to convert in to net cash position in FY17Eon account of robust cash flows. Initiative by central pollution control board (CPCB) to brighten opportunity: The pollution board seems to have finalized the fourth stage of emission standards for motorized two wheelers. The Bharat Stage (BS) IV/Euro-V standards will go into effect for type approval for new motor cycle models in April 2016 and for all motorcycle models in April 2017. Subsequently, all the motor vehicles need to adhere to latest standards which involve product up-gradation and is in turn expected to benefit Munjal Auto due to its considerable presence in the two-wheeler market. Strong client base lays foundation for sustainable growth: Around 92% of the revenue of Munjal is derived from the sale of exhaust systems for two/three wheeler players. Hero MotoCorp and Piaggio, their main clients, are the market leaders in the two wheeler and three wheeler segment having ~40% and ~32% domestic market share respectively. Therefore, having reputed clients can be an added advantage to expand their market share.

Valuation and Outlook:"At CMP of Rs.79, Munjal Auto is currently trading at 7.0x FY17E EPS. We value the company at P/E 8.2x for FY17E EPS for a target price of Rs.92, based on the future company prospects. We, therefore initiate coverage on Munjal Auto Industries Ltd (MAIL) with a “BUY” rating for a target price of Rs 92 representing an upside potential of 16.5% in a 9-12 month period", says Karvy Stock Broking research report.

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