Munjal Showa Ltd 30 th May, 2012

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1 Company Report BROKING DEPOSITORY DISTRIBUTION FINANCIAL ADVISORY Munjal Showa Ltd 30 th May, 2012 CMP Target Price Rs Rs Munjal Showa Limited in Hero Group's joint venture with Showa Corporation, designs and manufacturers shock absorbers and struts for leading two-wheelers and four-wheelers. It continues to be a leader in Shock Absorber Industry with unmatched quantity and quality level in OEM segment. BSE Code NSE Code MUNJALSHOW Market Cap (Rs Mn) Week High/Low 87.35/52.70 Industry Auto Ancillary Face Value Rs.2.00 Shares O/S EPS Book Value P/E 4.72 P/B 1.24 Shareholding Pattern The Company has earned a name, in the auto ancillaries manufacturing segment, of providing quality, commitment and competence. The company has registered excellent numbers for the quarter ending March The revenue stood at Rs million, up 12.81% as compared to Rs million during the corresponding quarter last year. Operating profit too jumped sharply about 52% in Q4FY12 at Rs million from Rs million in corresponding quarter last year. A comparatively tremendous net profit growth of 85.51% to Rs million was reported for the Q4FY12 compared to Rs million of same quarter previous year. EPS almost doubled at Rs.6.03 y-o-y. Margins too expanded nicely; operating profit margin witnessed a growth of 261bps at 10.03% and NPM surged 234bps at 8.97% on a y-o-y basis. MSL has augmented the capacity of its existing plants (Gurgaon, Manesar and Haridwar) and made all the three plants independent for all manufacturing facilities. Valuation Research Analyst: Vineeta Mahnot research@hemonline.com With esteemed clientele, strong assistance from promoter group, access to latest technology and research and dominant position in shock absorbers; Munjal Showa Ltd. revenue visibility looks strong. We believe MSL is trading at an attractive valuation at 3.72x and 3.08x of FY13EPS of Rs and FY14EPS of Rs We initiate a BUY on the stock with a target price of Rs.100 (appreciation of about 27%) with the medium to long term investment horizon. For Private Circulation Only 1 Hem Research

2 Business Details Munjal Showa was established in 1985, in technical and financial collaboration with Showa Corporation of Japan, the pioneering global leaders, is engaged in the manufacture of shock absorbers, Munjal Showa Limited is a member of Hero Group. The company is one of the biggest manufacturers of shock absorbers, telescopic front forks, struts, gas struts, window balancers / gas springs in the country. Nearly 95% of company's revenues come from the two-wheeler industry, out of which Hero Honda alone accounts for 85%. Thus, MSL is assured of a sizeable offtake at all times. The Munjal Showa manufacturing plant is spread over an area of sq mt in the industrial area of Gurgaon, Haryana, on the outskirts of the National Capital Territory of Delhi, India. Munjal Showa Limited is one of the largest suppliers of shock absorbers to major auto giants in India, Japan, Germany, the United States and the United Kingdom, amongst other developed markets. The Company's products conform to the highest standards of quality, safety, comfort and dependability and are QS 9000, ISO and ISO 9001 compliant. The use of advanced technology and a team of experienced personnel have led to outstanding growth in the Company. Munjal Showa Limited has established a strong foothold in the auto ancillaries manufacturing market and enjoys a wide patronage. Munjal Showa products serve as original equipment to a wide range of Maruti Suzuki upper-end cars and export models, Honda City car, complete range of Hero Honda motorcycles, Kawasaki Bajaj motorcycles, Kinetic Scooters and Hero range of mini-motorcycles and mopeds and Honda Motorcycles and Scooters India (Pvt) Limited. In over a decade the company's state-of-the-art shock absorbers, front fork, struts and window balancers/gas springs have become symbols of reliability and quality for popular two and four wheeled vehicles. For Private Circulation Only 2 Hem Research

3 Strong Industry growth The Rs 1,600 billion (US$ billion) Indian auto component industry derives its growth impetus from the growth in automobile industry. According to industry statistics derived by Automotive Component Manufacturers Association of India (ACMA), Engine parts form the largest segment (31 per cent) of auto part industry followed by drive transmission and steering parts (19 per cent). Suspension & braking parts and Body & Chassis account for 12 per cent each in the entire product range, followed by equipment accounting for 10 per cent of the same. As per industry estimates, Indian auto component industry derives 60 per cent of its turnover from sales to domestic original equipment manufacturers (OEMs), 25 per cent from sales to the domestic replacement market and around 15 per cent from exports. During as a whole, the automobile industry grew by a healthy 13.8 per cent. This helped the auto ancillary industry to record 11.9 per cent rise in its cumulative production during April 2011-February The demand for auto components was fuelled by commercial vehicles and two-wheeler segments, which recorded a production growth of per cent during the year. Thus, backed by a healthy demand from OEMs, CMIE expects the auto component production to have risen by 11.8 per cent during the year. A healthy demand from the replacement market and the overseas market is also likely to have aided this growth. The industry s exports, which account for around per cent of its turnover, are also estimated to have grown by a healthy 15.5 per cent during the year. Investment scenario to remain sound New Completed investment investment Outstanding investment Rs. Crores Rs Crores Rs Crores ,930 2,932 15, ,511 1,923 16, ,845 2,155 19, ,989 2,257 19, E 5, E 1,480 Besides completion of Bosch s capacity expansion plan at Nashik plant worth Rs.700 crores and at Jaipur plant with investment outlay of Rs.100 crores, the industry is expected to witness additional investment worth Rs.4,151 crores during Further, in , projects worth Rs.1,480 crores are scheduled for completion. For Private Circulation Only 3 Hem Research

4 Industry body Society of Indian Automobile Manufacturers (SIAM) expects overall automobile sales to grow by per cent in on the back of supportive Government policies, launch of new models and intensifying enthusiasm for cars among Indian consumers. Therefore, it could be expected that increase in demand for automobiles would eventually drive growth for auto parts sector. The auto ancillaries industry s market size is expected to grow by a healthy per cent during This growth is likely to be backed by a healthy demand from the OEM segment, which is a key driver of auto component demand. A buoyant demand from the replacement market and overseas market is also expected to aid this growth. An average annual 13.2 per cent growth in automobile sales during is expected to drive a healthy 9-11 per cent rise in demand from replacement market. The industry s exports are expected to grow by a moderate yet, healthy 13 per cent in Thus, a healthy demand from the automobile industry through OEMs, replacement market and exports is likely to drive 13.3 per cent growth in auto ancillary industry s market size during CMIE expects this growth momentum to continue in as well. The industry s market size is expected to grow by 15.8 per cent during the year. This growth is likely to be effected by 16.6 per cent growth in demand from OEMs coupled with a robust growth in exports. The industry s exports are expected to rise by a robust 19 per cent due to a likely improvement in demand from USA and Europe in Market size of Shock Absorbers to cross Rs.5,000 crore in Units E E (E) Production 000 nos 45, , , , , , Export Tonnes 3, , , , , , Import Tonnes 1, , , , , , Realisation Rs./Numbers Sales Rs. crore Domestic market value Rs. crore Source: CMIE For the year as a whole, CMIE expects the industry s sales to grow by 16.3 per cent. Steel prices are expected to rise by a moderate 3.7 per cent during the year. Hence, raw material expenses are likely to rise in line with sales. However, an expected slower 12.6 per cent rise in other expenses coupled with an expected modest 15.4 per cent rise in interest expenses are likely to help net profits to grow by a robust 26.4 per cent. Net profit margin is expected to expand by 50 basis points to 6.4 per cent in For Private Circulation Only 4 Hem Research

5 Strong Client base Munjal Showa is a key Original Equipment manufacturer (OEM) player for two-wheelers. It has around 90 percent of exposure to two-wheelers and remaining 10 percent to four-wheelers. MSL has strong goodwill as it is associated with well known promoter group- Munjal family (holding 39%) and Showa Corporation of Japan (holding 26%). It is one of the largest suppliers of shock absorbers to major auto giants in India, Japan, Germany, the United States and the United Kingdom, amongst other developed markets. Munjal Showa has reputed clientele and serve products to a wide range of Maruti Suzuki upper-end cars and export models, Honda City car, complete range of Hero Honda motorcycles and mopeds, Kawasaki Bajaj motorcycles, Kinetic Scooters and Scooters India (Pvt) Limited. Hero Motor Corp contributes the major chunk in the revenues of the company. Therefore, MSL is benefiting from Hero s expanding product portfolio. Further, the company has access to latest research and technology through support from Showa Corporation, Japan. A team of expert engineers from Showa, Japan, support and monitor the production of virtually zerodefect products. Excellent financial performance MSL has registered excellent numbers for the year ended March Revenues from operations surged about 21% at Rs million translating into operating profits of Rs.1230 million; a sharp growth of 49.44% from previous year. Sharp growth is on the back of low raw material cost. Raw material to sales (as a percent) declined to 74.74% from 75.22% Net profits almost doubled in FY12 from Rs million to Rs million. Margins too registered smart gains in FY12. Operating profit margin expanded 152bps at 7.9% and net profit margin widened 167bps at 4.31%. EPS for the financial year ended March 2012 stood at Rs For Private Circulation Only 5 Hem Research

6 Standalone Profit & Loss Account Rs. Million Particulars FY10 FY11 FY12 FY13E FY14E Net sales Growth 30.64% 20.65% 20.00% 18.00% Expenditure EBITDA Growth 52.71% 49.44% 20.32% 18.45% EBITDA margin 5.46% 6.38% 7.90% 7.92% 7.95% Other income Depreciation & Amortization EBIT EBIT margin 5.14% 4.42% 6.23% 6.29% 6.31% Interest PBT Tax PAT Minority interest/share of JV/Associates Adjusted PAT Growth Net Profit margins Extraordinary item Reported PAT Equity Capital Res. & Surplus , , Equity Shares EPS Ratios Particulars FY10 FY11 FY12 FY13E FY14E Return on Equity Return on Capital employed Debt/Equity Asset turnover Current Ratio For Private Circulation Only 6 Hem Research

7 Balance Sheet Rs. Million Particulars FY10 FY11 FY12 FY13E FY14E Share Capital Reserves & Surplus , , Shareholders funds Borrowings Deferred payment liabilities Deferred tax Liability Sources of funds Gross block 3, , , Accumulated Depreciation 1, , , , , Net block Capital work in progress Goodwill Investments Projects in progress Inventories Sundry debtors 1, , , , , Cash and bank balance Other current assets Loans and advances Total current assets 1, , , , , Deferred tax asset Current liabilities and provisions 1, , , , , Net current assets , , Misc exp Uses of funds 3, , , , , For Private Circulation Only 7 Hem Research

8 Quarterly Financial Highlights Rs. Million Particulars Q4FY12 Q4FY11 Q3FY12 YoY% QoQ% Revenues Expenditures (2.74) Operating Profit Net Profit OPM% bps 378bps NPM % bps 267bps EPS Past Price movement of the stock For Private Circulation Only 8 Hem Research

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