The Hindu Business Line : Munjal Showa: Buy

Clients include Hero Honda and Honda Motorcycles
Steady demand for two and four wheelers should drive earnings growth
Recent earnings improvement a positive

Long-term investors may buy Munjal Showa at prevailing levels. Strong fundamentals, encouraging business prospects and the improved profitability are positive features from an investment perspective.

Profile

Munjal Showa manufactures shock absorbers and struts in technical collaboration with the Japanese major, Showa Corporation. Munjal has a major exposure to the two-wheeler and passenger car segments. It derives bulk of its revenues from the original equipment market. The company supplies shock absorbers to Hero Honda, and Honda Motorcycle and Scooters amongst others. Maruti Udyog is its largest customer in the passenger car market.

With two-wheeler demand expected to grow, the prospects for Munjal Showa appears positive.

Considering that the company derives a bulk of its revenues from Hero Honda and Honda Motorcycle, its performance is linked to the growth rates logged by these companies. Helped by the growth in two-wheeler production recorded by Hero Honda and Honda Motorcycle, the company has managed to post a steady growth in the top line. The profitability has, however, been under pressure in the recent quarter owing to the sharp rise in the price of raw materials. Having a presence in the original equipment market, the company will find it difficult to revise product prices to accommodate changes in input costs.

Munjal Showa managed to post a sharp improvement during the quarter ended December 2005. The turnover increased by 11 per cent to Rs 155 crore and post-tax earnings more than doubled to Rs 5.3 crore (Rs 1.5 crore). The soft trend in the price of steel and the efforts to reduce the import content in raw materials helped the company post a sharp jump in earnings.

Expansion plans

The company is also making efforts to reduce its dependence on Hero Honda by expanding its client base. It is already catering to Maruti Udyog and is also in talks with other passenger car manufacturers. Any headway made in this direction would have a positive impact from a long-term perspective.

With the demand for two wheelers expected to grow at a steady pace, the prospects for Munjal Showa appears positive. The company has also completed a capacity expansion project in April 2005, which should help in meeting the to growing demand.

The efforts to reduce import content in raw materials would also have long-term positive impact. The "buy" recommendation is subject to the assumption that Hero Honda will continue to sustain the recent growth in two wheeler sales. Signs of a slowdown at Hero Honda would warrant dilution of holdings.

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