Stock Review: Munjal Showa

This was one of the stock which was in the safe bet list this year and it continues to remain so from my side. We recommended this stock at Rs 50-52 levels and even at current level the stock's downside is capped. The company has three plants at Manesar, Gurgoan and Haridwar. All these three plants are capable enough to meet its current demand. The management pointed out, they would slowly expand the capacity of 6-7% (Y-o-Y) from next year.

For this particular fiscal, we expect a 25% jump in topline and similar result could be seen in terms of net profit margin. Their margins have stabilised and for Q1 the company has done Rs 3.95 EPS. Hero Honda Group splitted into Hero Corp and Honda. Hero Corp pointed out that they would be targeting aggressive sales with new models. Given the parentage is Munjal, the order would directly flow to both Munjal Showa and Munjal Auto. So, there is limited downside risk.

The company has been very investor friendly in terms of dividend. They have increased their dividend from Rs 2 – Rs 2.5. Considering all this, this is a buy at current levels. It is buy on dips from a longer-term perspective of two years with a target of close to Rs 122-140. This kind of stock trades at 5 to 14 times PE multiple given the scenario of the market. We have taken median average of seven times. So, if a PE multiple of seven times is assigned from two years perspective, in next 18 months it can test Rs 120-140 mark.