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Sunday, Jan 02, 2005

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Munjal Showa: Buy

B. Krishnakumar

INVESTORS with a long-term perspective may include Munjal Showa in their portfolio. An impressive list of clientele, strong fundamentals and steady business prospects are positive features. Though the rising trend in raw material price is a cause for concern, the expected growth in business volume would mitigate the damage to the bottomline.

Munjal Showa is a major player in the shock absorbers and struts business. It has a technical collaboration with Japanese major, Showa Corporation. The company derives its revenues from the original equipment market. It has a presence in the two-wheeler and passenger car segments.

The company supplies shock absorbers to Hero Honda and Honda Motorcycle and Scooters, among others. Maruti Udyog is the largest customer in the passenger car market. Munjal Showa derives over 70 per cent of the turnover from Hero Honda and Honda Motorcycle.

Taking into account the degree of dependence on the original equipment market and a couple of its customers, the business prospects for the company are tied to the growth rates achieved by Hero Honda. The latter has managed to gain market share in the recent quarters after ceding a few percentage points to its competitors. Honda Motorcycle and Scooter have also logged impressive volume growth in the past couple of years.

As a result, Munjal Showa has recorded a steady growth in turnover. Owing to the sharp rise in the price of raw materials, the impact of the growth in turnover has not been reflected in the bottomline. The price of steel — the key raw material — has risen sharply. With a presence in the original equipment market, the company would find it difficult to revise product prices to accommodate changes in input costs.

The continued firm trend in price of steel is a cause of concern. On the other hand, the business volume is expected to grow at a healthy pace. The entry of Honda Motorcycle and Scooter into the motorcycle market (through the launch of Unicorn) is a positive development as Munjal Showa supplies shock absorbers for this model. The company is also working with Suzuki Corporation for the supply of shock absorbers for their motorcycles. With Hero Honda having lined up model launches, the demand for Munjal Showa's shock absorbers is likely to remain robust. To cater to growing demand, the company has lined up capacity expansion plans with a new unit in Gurgaon.

Taking into account these factors, the outlook for the company is positive. Investors need to keep a tab on the trend in steel price and the production of motorcycles at Hero Honda's end. Signs of a slowdown in the motorcycle market or a loss of Hero Honda's market share in motorcycle market could affect Munjal Showa's prospects. These constitute key risks to our recommendation.

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