On A Smooth Drive - Munjal Auto

We had recommended Munjal Auto Industries (MAIL) to our investors in our Issue No 6 dated March 15, 2009 in the ‘Low Priced Scrip’ column at Rs 30.70. Post this recommendation, the counter shot up to Rs 47.95, thus providing an upward return of 56.18 per cent. It is still hovering around the same price. The reasons for recommending the scrip included its future earning visibility and the fact that this scrip is available at cheaper valuations than its peers.

MAIL manufacturers auto mufflers (used in silencers of two-wheelers) and motorcycle rims and their principal customer being Hero Honda Motors, this gives them a strong hold in the market. The company is expanding its muffler capacity by 25 lakh units, taking the total capacity to 51 lakh units. Additionally, the company is building a plant each in Haryana and Haridwar which are expected to be commissioned by April 2009 and December 2009 respectively. The estimated capex for these projects is around Rs 60 crore that is to be funded through internal accruals and debt in an equally divided ratio.

With the declining prices of nickel by 65 per cent to USD 9,500 per tonne since April 2008 and steel prices being relatively lower, the margins are expected to improve in the near future. The company has investments worth Rs 23.30 crore as against a market cap of Rs 45.30 crore, which implies that its core business is valued at only Rs 22 per share. At its CMP of Rs 45, the scrip is available at 3.6x its trailing of four quarters earnings. With its EV/EBIDTA of 1.62x the scrip is still quite attractive. Considering all these factors our suggestion is that investors should book profit on this counter due to sharp upturn.