Summary: Munjal Showa is at its 52 week high right now, but still looks attractive. That cannot be said about many companies in the market. The reason for the same is that the company has a history of consistently high performance and is simply repeating its history! Personally, I wanted to check if it is the time for me to book my profits and exit but I have now decided to stay put for longer term.

My Holdings:

My Present Holdings
Avg. Purchase Price	Holding period	Highest Purchase Price	Lowest Purchase Price	Unrealized Profit/Loss
60.49	LT  1 Year	63	52.1	20.84%

About MUNJAL SHOWA:

 The company is an automobile ancillary and is a manufacturer of shock absorbers and struts for two wheeler industry in India. It is a joint venture between Munjal Group and Showa Corporation of Japan.

MUNJAL SHOWA’s Ecosystem:

Indian automobile industry is serviced by a highly competitive field of OEMs and ancillaries and these vendors have to compete in terms of quality rather than price. Due to intense competition, the margins in this industry are on the lower side as compared to the parent automobile industry. The competitive advantage comes from established quality practices, stable sourcing and reliable customers.

The growth of players in ancillary industry is driven by the growth of the automobile industry per se. For Munjal Showa, the primary customers are Hero Moto Corp, Honda Motorcycles and Marti Suzuki.

MUNJAL SHOWA’s position in its ecosystem:

In terms of pure auto ancillaries across all auto segments, Munjal Showa is the 6^th largest auto ancillary in the country with an annual gross revenue of over 1385 Cr. That the industry is highly fragmented can be verified by the fact that there are over 100 auto ancillaries that are listed in the stock exchanges and of those over 80 companies had revenues of less than 500 Cr. in last year.

Based on this perspective, one can say that Munjal Showa is a a relatively large player in the auto ancillary firm and an operator of significance in the industry.

When we look at its customers, we see that Hero Motocorp, Honda Motorcycles and Maruti Suzuki are all leading players in their respective segments (two wheelers and four wheelers). Also, one knows that our two wheeler market in India has been recession proof in the last 3-4 years and has been growing like anything. It is agreed that this pace of growth has to slow down sometime, and that sometime will happen in the next few months rather than later, but still being a primary vendor of the leading companies within the leading growth industry in a leading growing economy CANNOT BE BAD.

Based on these additional data points, I conclude that Munjal Showa is in a thriving ecosystem and plays an important role in it. Is immediate future is very secure in terms of its expected business and so it does not have to lose its sleep worrying about its existence.

Reported Financial Performance:

The in the last FY2010-11, the company’s total revenue and PAT increased on a YoY basis.

Below is a high level view of the company’s finances as reported in its annual report

FY	2008-09	2009-10	2010-11
Net Sales (Rs. Cr)	842.76	1003.99	1289.29
Reported pat (Rs. Cr)	20.69	24.61	34.02
Average Net Worth (Rs. Cr)	158.82	171.47	190.68

Free Cash Flows to Equity Owners:

 Along with the above finances, one can look at the below measures from the company’s annual financial statements.

FY	2008-09	2009-10	2010-11
Cap Ex	63.57	22.58	0.57
Dep + Amortization	16.86	23.08	26.25
Absolute change in Non-Cash W/C	3.83	-18.06	9.4
Total Increase in Debt	66.14	22.35	-37.95
Total Increase in Deferred Tax Liability	1.49	3.84	-0.78

 One can see that the two years ago, the company took some big capital expenditures to the tune of 63.57 Cr. If one looks at the last 6 years history, one would realize that the company normally has small CAPEX each year, but in the last 2 years the company has reduced its Capital Expenditures to near 0 this FY. It looks like this is a cyclical investment that the company makes.

Also, if one looks at some history for the firm, one would know that the company finances all its CAPEX projects from Debt. This impacts its profits in the way of its increased interest expense. In the last FY, the company actually paid back it debt to the tune of about 38 Cr., where as it was borrowing a lot of debt till then. Therefore, it is important that to understand the impact of debt  on the company’s finances, one has to normalize the debt actor.

Similarly, the non-cash W/C status of the company also changes sign each year. Even though the absolute amount of change is small in the bigger scheme of things, one can normalize this factor too to understand its impact on the company’s financials.

When I normalized the above factors and calculated the FCFE, I get the following data (all amounts in Rs. Cr.):

Average last 3 FY Sales	1045.35
Net Profit (latest)	34.02
Cash Value	3.34
Latest FCFE after Normalization of Debt and Capex	46.36
Latest FCFE before Normalization of Debt and Capex	30.60
Average FCFE after normalization for the past 3 years	36.27
Average FCFE before normalization for the past 3 years	37.12

Clearly for MUNJAL SHOWA, one can see that its Free Cash Flows on a 3 year normalized basis are nearly the same as the reported profit and are not negative. This indicates that the company is not only reporting a profit but is actually in exactly the sound shape as it is claiming to be from its earnings statements.

Fit vs Flab:

With a good amount of debt retired, the company has less interest to pay. As a result, in the last FY its interest coverage (the parameters that tells us how much money is left after mandatory obligations are paid) was at a healthy 6.3 This indicates that the company has good enough eanings over and above its mandatory obligations, and that is a good thing.

However, for the company the current assets are lower than the current liabilities. For a manufacturing company, this is a sign that the company has still some scope to improve its process efficiencies. Leaders of the industry (like Bosch) or the star performers (like FAG Bearings) are the ones that are managing their working capital better, and that is an example Munjal Showa will do well to follow.

Based on above, I believe Munjal Showa I fit to survive the vagaries of its industry, but it can become fitter.

Ownership Structure:

65.02% of the company is in the hands of its promoters. This is not ideal under normal conditions; as if the company performs poorly then it will be difficult for someone else to buy it. Having said that, one advantage that comes with a company that has high promoter holding is that such a company prefers to pay handsome dividends (as dividends are tax free in India). Hence, if the company is making money consistently and over a long time, then it can be said that its ownership should not be an issue.

In this regards, we see that Munjal Showa is making consistent Money (3 years free cash flows) and has been in the business for a long time (JV between Munjal and Showa happened in 1985).

Based on this, I can say from a lay investor’s perspective that that the ownership of over 65% is not ideal, but can be tolerated for Munjal Showa.

Return on Net Worth: 

The PBIT/Avg. Net Worth for MUNJAL SHOWA was 25.8% 6 years ago. It has increased to 29% in the last FY. In this time, the highest value was 29.5% in 5 years ago and 22.2% two years ago. This consistency has been there despite the changing market conditions (recession 3 years ago) and increased competitiveness of the Auto Ancillary industry which ought to have put price pressures on the companies.

Based on this statistic alone, one can say that the company HAS GOT the formula to make good money and is using that formula wisely.

Value Judgment:

The company has a small amount of Cash in hand. This is OK as a manufacturing company need not be cash heavy. I remove this cash amount from the share price of today, and compare the free cash flows to the share price. By doing so, we get the following nos:

Company	Munjal Showa
Latest BSE closing Price	73.2
P/E Reported	8.6
P/FCFE Updated (After Normalization – Latest)	6.2
P/FCFE Updated (Before Normalization – Latest)	9.5
P/FCFE Updated (After Normalization – Last 3 FY Avg)	8.0
P/FCFE Updated (Before Normalization – Last 3 FY Avg)	7.8
P/Trailing 4 Qtr Earnings	5.7
P/Bv	1.54
Current Assets > Current Liabilities	False
Interest Coverage	6.38

The company is trading at 8 times its last 3 years average free cash flows (which is on the lower side) and is trading at 1.5 times its book value (which is on the average side). As per the analysis earlier in the article, there are no issues with the finances of the company with regards to their validity and the prospect of its future earnings.   To boot, the company is trading at only 5.7 times its trailing 4 quarter’s net profit, and this indicates that unless a major change in fortunes happen, future annual no.s will be better that last FY’s numbers.

 On the basis of this, in terms of its stock price I can say that:

• There is practically no down side to the stock price due to the fundamental valuations of the company. The market is still not valuing the company has highly as one would expect, and I believe high ownership % as the main reason for the same.
  • From a lay investor’s point of view, that is not a concern in this case.
  • The stock is not as liquid as Hero Motocorp and over the past one year it has not fluctuated as rapidly as the main indices. I this light, there are no quick gains to be made from this company as the stock is not grossly undervalued.
  • Hence, overall the investment should give handsome returns over a longer (an year’s) timeframe at current prices, but any huge immediate fluctuations should not be expected.

Verdict:

Investing in Munjal Showa is relatively less risky at present levels. For a patient investor who is willing to look longer term, this is a good opportunity. Even though the stock is not undervalued, it still has prospects of paying handsome returns over a longer timeframe.

Personal Note on MUNJAL SHOWA:

I the past one year, Auto Ancillaries and Media & Entertainment have been two sectors where my investments have been very good. Auto Ancillary is the sector with which I started my investment journey. I invested in 3 companies (Munjal Showa, FAG Bearings and Wheels India) and was right in all 3 counts. Due to the intense competition in these sectors, it was easier to differentiate a good balance sheet from a bad one, and that was to the advantage of a retail investor like me.

Over and above this I realized that a company with high promoter ownership tends to pay higher dividends and that is an aspect of investing that small investors ignore. I was pretty surprised when I received my dividend which was well in excess of other companies with similar investments.

Since the company is at its 52 week high, I was thinking of whether it is the right time for me to exit. Based on my analysis, I believe that I should stay put for longer term.

Lessons learnt:

• A sector with high competition is one where it is easier to find good companies.