Munjal Auto Industries- Opportunity or Not?

Stock Opportunities Untested - but worth a good look
1

I was studying Munjal Auto Industries and thought of posting a small analysis and get some valuable feedbacks from all the community members.

Background
MAIL is a part of the famous Hero Group of companies, it was established in the year 1987 with manufacturing of Bicycles for exports supplying to UK, France, Germany, and to the US and Canada. Over the years, the company has moved on to the manufacture of auto components for the 2/4 wheelers automobile industry. The company provides exhaust systems, steel wheel rims, and spoke wheel rims for two-three wheelers; and fuel tank assemblies, seat structure systems, and side step assemblies for four-wheelers.

The company is a subsidiary of Thakurdevi Investments Pvt. Ltd. It is part of the Munjal group of companies and has 4 manufacturing plants, which are located in Gujarat, Haryana and Uttarakhand.

The company’s performance in terms of returns can be studied from the details in the table below.
ROE:28.06%(FY 2014), 31.03%(10 years)
ROCE:22.81%(FY 2014), 38.56%(10 years)

Customer Base
• Hero Motor corp.
• TATA motors
• Tata Johnson Controls Automotive Ltd.
• General Motors India Pvt. Ltd.
• Piaggio Vehicles Pvt. Ltd.
• Suzlon.

Operations Front
• MAIL is one of the largest manufacturers of exhaust systems in the world. The company manufactures close to 22,000 exhaust systems per day. Besides, the company produces more than 10,000 spoke rims for the two-wheelers and steel wheel rims daily.
• It has an OPM of around 7-8%.
• It offers a wide range of auto components for 2/4 wheelers.
• Raw material is the major component of cost, followed by employee expense.
• It has 4 Plants, located in 3 different states.

Valuation Analysis
P/E: 8.51
Div Yield: 2.79%
ROE (10 years): 31.03%
Price to Book Value: 1.72
CMP: 74.45

Other Key Details
• The company has been consistently paying out dividends. It has an average dividend payout of 20.58% for 3 years.
• Promoter holding is 74.81%.
• It has a debt-equity ratio of 0.34.
• Approximately 50% of MAIL’s revenue comes from tax-free Haridwar plant, which also contributes more than 75% to profits. This plant has excise benefit until FY19.
• The fourth unit at Dharuhera in Haryana has just become operational with an investment outlay of INR 32 crore. This new facility will further boost company’s prospects to widen product range and exports.
• In the past 5 years the company’s sale have picked up growth and has registered a sales of 816.47 Cr. in the FY2014 and 898.49 in ttm.
• It has also invested 41.63 Cr. in CWIP, indicating towards the expansion motive of the firm.
• It has two Technology Partners namely, Samasung Ind. Co. Ltd. and Lafranconi. It has collaborated with them for product design.

These are few of my observations about the firm and I feel that it might hold some potential.
I am looking forward for some valuable inputs and insights from the forum members. Please give your valuable feedback and help me learn more about investing.

2

I have briefly looked at this company before.

More than 70% of its business comes from Hero. Such kind of client concentration risk will mean that the business will never attract multiples of more than 8-10 in the long term. Besides growth is heavily linked to how fast/slow Hero is going to grow.

I would rather invest in Hero itself which has much better business fundamentals!

3

I think its the same problem with Munjal Showa as well- the company has much better financials or return ratios as compared to Gabriel India. However, it’s only the latter which investors are excited about because of the client concentration risk faced by the Munjal companies

4

EQAXScore is Munjal Auto Industries is 94 out of 100,which is great.
SHP Rating is 100,decent Turnover Rating which is 73.Hence Confidence Rating is 87.Debt Rating is 75.Growth Rating is 70.
Overall fundamentally strong stock. :thumbsup:

5

Just an observation: Eicher Motors EQAX score is 27 and that of motherson is 28. I doubt if that scoring implies eicher and motherson are fundamentally weaker and that too by such a huge margin.

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6

I am thinking long and hard here. Are the RoE’s high because of :smile:

  • the tax benefits
  • the ostensibly lower costs of fixed assets - which probably has percolated to them because of HMIL’s parentage

In a scenario, where the buyer and seller are of the same parentage (hero honda promoters in this case), there is bound to be some tax efficient planning (since this pays low tax, promoters might want to be more liberal in pricing and hence keep more money in here) and I am wondering if this is the reason for this high RoE’s - no one else in a comparable metal bending business makes this kind of margins.

I think this could be a business whose moat needs to be investigated further. I am not convinced

7

Wow, that was a point of view not everybody can come up with…kudos Varadharajan!!
Though it would be difficult to verify this!!

8

A company with a client concentration of 70 % can be considered a risky investment.
But in this case , the main client or the client contributing towards 70 % revenues is the parent company. Wouldn’t it mean continued business for Munjal. I feel this is a moat and not a risk.

9

I would not be worried about client concentration so much as about sustainability of RoE’s over a long life cycle. Given promoters are the same and this company pays lower tax, why would I not keep a larger chunk in here to avoid paying uncle india more.

I would want to know what the pricing is for non-hero honda and how that compares with the former ? that alone can tell us if this is sustainable.

Think about it - not a single other company in the metal bending business like silencers makes this sort of RoE’s/ROCE’s like minda, sandhar etc.

has anyone talked to the management ?

10

Results out.Net sales down to 209 Cr viz 217 QoQ
Net profit slightly better…up to 7.93 Cr from 7.58 QoQ
Better margins , probably because of lower crude price?

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