I have a small exposure to Shivam Autotech (Av. Invest Price 115 Rs.), as well as Munjal Auto (Av. Invest Price 32 Rs.), as well as Munjal Showa (Av. Invest Price 87 Rs.). Put together, my investment in these companies is around 2% of my entire portfolio.
All three are Munjal (Hero) companies, which are either owned by the Munjals of Hero , or other Munjals, and have Hero Honda as their primary customer.
All companies enjoy similar growth rates (Approx 4-5x topline growth in 10 years), and similar PE ratios (Around 8-9). All 3 have low or no debt.
A common feature of all 3 companies is that their current Income tax rates are very low, since they all enjoy accumulated MAT credit. In the next couple of years, IT rates should revert in all 3 companies to more normal rates. This will cause the PE ratio to rise.
All three companies were nobrainers at the prices I bought them, with PE ratios around 4-5, and Dividend Yield of 3-4%. Of the three, Shivam Auto lagged price growth (partly because it was in PCAS earlier), but in the last month or so, it has caught up in terms of market price.
However, prices have run up. So the question is, Should one buy now, and which one of the three companies is best bought?
Whether you should buy or not is of course dependent on your overall outlook for the 2 wheeler industry, Hero Motocorp and markets. The general PE that Munjal Showa enjoyed in the 2007-08 bull market was around 10, so there is probably not much in terms of PE expansion to be enjoyed hereon. While these businesses all have ROE’s in the low 20’s (which is not bad), this may suffer, as they diversify their buyer profile, and as the separation between Hero Motocorp and these companies happens more deeply over time. So markets are unlikely to assign very high PE’s to these companies ever.
Personally, I think Munjal Showa is the best buy amongst the three. For one, while Hero is the largest customer, it is not the only one, Indeed it also supplies to Honda, and other motorcycle (Honda) and 4 wheeler manufacturers (Maruti). (Though, Honda is setting up another plant in the South, and Munjal Showa will not be its supplier there). It is also much larger than the other 2, meaning that it has slightly more pricing power. Third, it is also owned partially by Showa, which means that there may be better corporate governance (I am not implying that the Hero group has poor corporate governance, but simply stating that if there is a partner involved, the promoter has to be more careful with the entire corporate governance structure). Fourth, it is net debt free, indeed, it holds a cash surplus. Enam owns around 6.5% of the company.
If you are a trader off course, the momentum’s been with Shivam Autotech.
) and a small position in Solar Industries .