Karvy Stock Broking is bullish on Munjal Showa and has recommended buy rating on the stock with a target price of Rs 238, in its research report dated August 04, 2015.
Karvy Stock Broking's report on Munjal Showa
The performance of Munjal Showa Ltd (MSL) is fundamentally based on the performance of Hero MotoCorp (HMCL) as it forms their primary client base where a significant portion of their revenue is drawn from here. Considering Hero’s growth trend to be the back bone, the variables used for revenue estimations are a function of the number of shock absorbers sold and per unit realization.
The total domestic capacity of Hero MotoCorp stands at 7.65 Mn units and is likely to go up to 8 Mn units aided by Neemrana plant expansion by September 2016. Moving forward, the capacity is expected to ramp up to 10 Mn units by the end of March 2017 mainly attributable to their new Gujarat plant. On account of this, we have estimated the shock absorber volume to increase by another ~2Mn units by FY17E from current levels of ~36Mn units. Therefore, we expect the revenue to increase at a CAGR of 4% between FY15-17E and EBITDA margins to shoot up to 8.3% in FY17E from the prevailing 7.9% in FY15 eventually improving PAT margins to 5.4% in FY17E from 4.6% in FY15. Factoring the above aspect, RoE is expected to slightly increase to 18.5% in FY16E, and for FY17E it is expected to slightly dwindle to 17.3% due to nominal bottom-line growth and conservative dividend estimations.
The company is currently enjoying zero-debt status which can pave ways for future expansion plans. Also, there has not been any significant capex since 2012 which has lead to robust free cash flows. Moreover, the company has almost doubled its current investments in FY15 due to surplus cash generation. Therefore, the company has sufficient headroom available for business expansion. In addition to this, they also hold a good track record for dividend pay outs.
Valuation and Outlook:
"At CMP of Rs.204, Munjal Showa is currently trading at 8.6x FY17E EPS. We value the company at P/E 10x for FY17E EPS for a target price of Rs. 238, based on the future company prospects. We, therefore initiate coverage on Munjal Showa Ltd (MSL) with a “BUY” rating for a target price of Rs. 238 representing an upside potential of 16.6% in a 9-12 month period", says Karvy Stock Broking research report.
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