munjal auto hsfc sec jan 12

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					Munjal Auto Industries Ltd (MAIL) (CMP - Rs.36.15)

   Techno-Fundamental Note                                                                                         January 5, 2012

  HDFC Scrip                                                       Recommended                                                Time
    Code                   Industry                CMP                Action               Stop Loss           Target        Horizon
 MUNAUTEQNR             Auto Ancillaries          Rs.36.15            Buy at CMP             Rs.34.00          Rs.41.50      4-6 weeks

Company Background:
MAIL Industries Ltd (MAIL) is a leading auto component manufacturing company in India producing exhaust systems complete
for two wheelers and four wheelers, Spoke rims for two wheelers, Steel Wheel Rims for two wheelers and four wheelers, Fuel
Tanks for four wheelers, Seat Frames for four wheelers and other automotive assemblies. It has a technical collaboration with
Samsung Industries Ltd. of Korea for the manufacture of Fuel Tanks for four wheelers. It is the largest manufacturer of the
exhaust systems in the world, manufacturing close to 20,000 systems per day. Mufflers contribute 80-85% of MAIL’s sales.

MAIL is a part of the famous Hero Group of companies, sporting flagship companies like Hero Moto Corp (HMCL - earlier
called Hero Honda Motors) and Hero Cycles.

Product Range
For 2 Wheelers:
  Exhaust Systems - MAIL manufactures over 22 different models of exhaust systems complete for motorcycles and scooters.
  It has the capability to manufacture exhaust system for four wheelers also. The exhaust systems are heat resistant painted,
  to withstand up to 600 degree Celsius.
  Steel Wheel Rim - MAIL has the capability to manufacture Steel Wheel rims for two wheelers, three wheelers and
  passenger cars. The Products are made to match international quality standards to ensure uniformity of gauge, well defined
  profile, and leak-proof weld joints.
  Spoke Wheel Rim - The installed plant capacity is 15,000 rims per day using imported multistage, profile forming rolling mills
  from U.K, JAPAN and TAIWAN. MAIL manufactures 10,000 nos. motorcycle rims per day approx. MAIL has the capability to
  manufacture spoke rims of the following range using IS Grade cold rolled steel. All rims are Tri – Nickel chrome plated to
  International Standards.

For 4 Wheelers:
• Fuel Tank Assembly - It manufactures fuel tanks for 4 wheeler from 15 to 100 litres fuel capacity using pre-coated low
  carbon steel & advance steel processing technology.

  Seat Structure System - MAIL manufactures complete seat structure for passenger car using ERW, CDW tubes, CRCA &
  HR sheet stampings, wired parts, hardware along with seat recliners. MAIL is capable to deliver high volume, excellent
  quality seat structure assemblies for any size of 4 wheelers.

  Side Step Assembly - MAIL manufactures Side step assembly for stepping support to SUVs & MUVs of global automobile
  companies including GM India. Side Step assemblies are made out of aluminum alloy extrusion sheets duly hard anodized
  or chromated assembled with end cups (PP-glass filled) & powder coated steel brackets. Side Step assemblies are highly
  durable, rust free & aesthetic etc.

  Complete Assemblies – MAIL the capability to manufacture complex assemblies involving sheet metal & tubular welded
  components for 4 wheelers including, B I W parts, Pillars, Cross Bars, Control Arms & Tie end Bar. Accelerator, Brake &
  clutch pedal assemblies.

  Sheet Metal Components - MAIL has the setup and expertise to manufacture a wide range of Sheet metal /tubular parts for
  automobiles including, Mild Steel parts (Hot Rolled and Cold Rolled), Stainless Steel parts, Welded Components, Tri-nickel
  Chrome plated components, Liquid Painted, oven baked parts, Heat resistant painted parts, Tubular Components, Roll
  formed parts.

Plant Locations
Location                     Establishment Year              Product Range                                          Total Employees
                                                             Exhaust System, Spoke Wheels, Rims, Steel Wheels, Fuel
                                                             Tank Assembly, Complete Structure and Side Step
Waghodia, Gujarat                          1987              Assembly                                                       1,300
                                                             Exhaust System, Seat Metal & Tubular Assemblies &
Bawal, Haryana                             2008              Central Tool Room                                               300
Haridwar, Uttarakhand                      2009              Exhaust System                                                  300

Technology Partner
Working with Japanese company since last 2 decades MAIL has developed technical expertise & best manufacturing skills by
practicing innovative strategies to deliver best to esteemed customers. Continuously it explores best possible opportunities to

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adopt & share most advance & next generation technology with world-renowned global leaders. MAIL has a technical
collaboration for design, development & manufacturing of modern age fuel tank assemblies for 4 wheelers including passenger

MAIL’s major customer is HMCL, from whom it derives ~85-90% of its sales. The other customers include Tata Motors, Tata
Johnson Controls Automotive, General Motors, Piaggio Vehicles and Suzlon.

Shareholding Pattern
                                     % of Holding        % of Holding        % of Holding        % of Holding          % of Holding
Particulars                            30/09/2011          31/06/2011          31/03/2011          31/12/2010            30/09/2010
Indian (Promoter & Group)                   74.81               74.81               74.81               74.81                 74.81
Non Promoter (Institution)                    0.07                0.07                0.07                0.07                  0.07
Non Promoter (Non-Institution)              25.12               25.12               25.12               25.12                 25.12
Total                                      100.00              100.00              100.00              100.00                100.00
                                                                                                         (Source: Capitaline Database)

MAIL announced sub-division of one equity share of the company having a face value of Rs 10 each fully paid up into five
equity shares having a face value of Rs 2 each fully paid up on September 26, 2011 and went ex on December 30, 2011. It is
currently quoting at Rs.36.6.

Investment Rationale
Wide Product Range:
MAIL holds the pride of being among the largest manufacturer of the exhaust systems in the world, manufacturing close to
12,000 systems per day. MAIL manufactures over 20 different models of exhaust systems complete for motorcycles and
scooters. It has capability to manufacture exhaust system for four wheelers also. The wide range of MAIL’s products includes
electro plated and painted exhaust mufflers for motorcycles and scooters, electro plated rims for motorcycles, steel wheel rims
for scooters and passenger cars, precision sheet metal parts / modules and side step assembly complete for MUVs and

For 2 Wheelers
Exhaust System                                Steel Wheel Rim                         Spoke Wheel Rim

For 4 Wheelers
Fuel tank Assembly                            Seat Structure System                     Side Step Assembly

It manufactures exhaust mufflers and rims for several new models in the motorcycles segment. MAIL manufactures motorcycle
rims as per their customer specifications. It manufactures all types of precision sheet metal parts / components. This is its core
strength area. Right from the design to production, the company offers precision sheet metal parts / components as per the
customer specifications. MAIL offers a comprehensive side step assembly complete for MUVs and SUVs.

Hero Moto Corp - Esteemed Customer:
Hero Moto Corp (erstwhile known as Hero Honda Motors) is a major customer of MAIL contributing ~85-90% of its sales.
HMCL is a strong player in the two-wheeler industry. HMCL is a dominant player in the Indian 2 wheeler market with a share of

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46%. MAIL supplies ~75-80% of its requirements in all high-end motorcycles and 100% in case of scooters. Close to 90% of
Hero MotoCorp’s (HMCL) muffler requirements are met by MAIL. The company supplies to all HMCL models, except 100 cc

HMCL, the world's largest two-wheeler maker by volume, posted record sales of 540,276 units in December 2011, registering
a growth of 7.8% y-o-y. The company sold record 6,117,599 units of two-wheelers in the period January-December 2011, a
growth of 19.2% over CY10 when it had sold 5,134,549 two-wheelers. Q3FY12 also reported the most successful quarter for
HMCL with sales of 15,89,276 units, up by 11.3% over Q3FY11, when the company had sold 14,28,030 units. December
month production has been the best ever in the company’s history. HMCL normally has a 5-day plant shutdown in December
every year; however, this time as demand for two-wheeler remained strong, it decided to do away with the shutdown.

It has been able to maintain strong growth since the end of the JV with Honda and also expects the same momentum to

HMCL has shown a remarkable resilience in volumes post the split clocking 0.5 mn units per month on a consistent basis. The
current adverse macro economic climate is expected to have a lesser impact on the two wheeler industry. This gives a clear
indication that MAIL also could witness a similar growth as HMCL as it derives major of its sales from the group company.

The Indian two wheeler industry’s growth rate remains intact. Two wheelers have had a brisk run this fiscal and the overall
numbers could be a little over 14 mn units, a growth of 15% over 2010-11. 9.2 mn units of two wheelers were sold during the
period of April 2011 to Dec 2011 compared to 8 mn units sold in the same period last year. During 9MFY12, scooter segment
has advanced by ~14%. According to ACMA's report, the two-and-three wheelers are expected to double to 22 million units by
2015 and reach 30 million units by 2020, driven by low penetration level, expanding rural sales and growth in exports.

New plants and capacity additions to meet increased demand:
MAIL has 3 plants in all located at Waghodia, Bawal and Haridwar. Haridwar and Bawal factories, as reported in FY11, have
already been operational and operations at both plants have stabilized. These plants have been established to meet the
increased demand from its prime customer HMCL. This has helped MAIL to achieve a record turnover of Rs.571 cr in FY11.

In order to meet customer needs and competition, MAIL is also investing in an aggressive new product development
programme. Success of new product launches could have an important bearing on its future growth and profitability. It has set
up a Central Tool Room at Bawal entailing investment of Rs.15 cr.

MAIL fetched an order for supply of fuel tanks to Tata Motors-Nano cars and has already set up a dedicated manufacturing
facility at Waghodia in Vadodara, Gujarat. The capacity of fuel tank is 1,50,000 units per annum. The plant commenced
production from January 24, 2011 onwards. During the last 5 years, MAIL has invested over Rs.70 crore for all these

MAIL will be debottlenecking its existing plants to cater to HMCL’s requirements. Plant wise production stands at 8,000
units/day at Haridwar (to go up to 9,500 units in FY13), 5,500 units at Bawal (7,000 units in FY13) and 4,500 units at Baroda.
Management feels that two wheeler business is low capital intensive and with Rs.250-300 mn capex, it can generate Rs.1 bn
revenue in 2 years time.

All these new capacities (some specifically allocated for its esteemed customers) and new product launches could give
impetus to its volume and value growth going forward.

Presence in tax free zone enables low tax rate:
Almost 50% of MAIL’s revenue comes from tax free Haridwar plant, which also contributes more than 75% to profits. Haridwar
plant has excise benefit till FY19 and income tax benefit FY14. 70% of Haridwar profits post FY14 will be taxed.

Strong financials and healthy balance sheet:
MAIL has maintained consistent growth trajectory with revenue CAGR of ~21% over FY07-11 and Net Profit CAGR of ~7%
over FY07-11. This has been led by consistent performance by its largest client HMCL (18% sales and 22.4% PAT CAGR
over FY07-11). Balance sheet is healthy with net D/E of 0.6x, though the rise in leveraging is led by investment in capacity
expansion over FY09-11. Its return ratios remain strong at 25-30% in FY11. Its cash per share as on FY11 is a healthy Rs.6.3.
Its working capital efficiency is better compared to peers in the same industry as is clear from the table below:
Particulars (FY11)                              MAIL              Amtek India      Autoline Industries                  Subros
Debtor Turnover                                  36.6                     5.2                     10.2                     10.3
Inventory Turnover                               12.5                     3.9                     18.8                     24.9
Creditor Turnover                                58.6                  130.5                      46.7                     66.4
                                                                                         (Source: Company, Capitaline Database)

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                         Grow th Rate
         85.0%                                                                1.4                                                 50.0%




 % Chg

                  FY07   FY08      FY09          FY10    FY11
                                                                              0.0                                                 10.0%
                                                                                      FY07    FY08      FY09     FY10    FY11
         -50.0%                                                                                         Period
                            Sales      Net Profit                                   Debt-Equity (x)        ROCE (%)             RONW (%)

                                                                                                       (Source: Company, Capitaline Database)

Consistently rewarding shareholders:
MAIL has been a good dividend paying company for the past many years. It has been consistently declaring dividends that
translate into a good dividend yield. This indicates that it liberally rewards its shareholders.

                                                        Dividend Amt paid                             Dividend Yield % as       Dividend Payout
Year of Dividend                   PAT (Rs. Cr)                   (Rs. Cr)          % of Dividend            on March 31               Ratio - %
2007                                      18.6                         5.0                     50                     2.0                   27.9
2008                                      10.3                         1.5                     15                     1.3                   15.2
2009                                      11.1                         2.5                     25                     4.0                   23.1
2010                                      15.8                         5.0                     50                     4.8                   31.6
2011                                      25.3                         7.5                     75                     6.5                   29.7
                                                                                                            (Source: Company, Capitaline Database)

Industry Overview:
With the robust growth in the Indian economy for few years now, the resulting increase in the income levels specially of a
rising middle class and lifestyle aspirations of the demographically favourable constituent population, the potential size of the
Indian passenger vehicle market in the next five years is likely to be as large as 4-5 million vehicles with a conservative growth
rate of 10-12% per year.

The auto industry has grown at a very healthy clip over the last decade. During this period, the industry volumes have
increased by 3.2 times from a level of 4.7 million to 14.9 million vehicles. As income levels rise and easy finance availability
continues, the industry will continue to see a healthy growth rate. SIAM (Society of Indian Automobile Manufacturers)
estimates that the growth of the auto industry in FY12 will be in the region of 12-15%.

The currently low vehicle penetration of 15 vehicles per 1,000 inhabitants, compared to a world average of 120 vehicles per
1,000 inhabitants also suggest that there are significant growth opportunities lying ahead for the Industry. According to
experts, the automobile market growth gets on a high trajectory when a country’s per capital income on a Purchasing Power
Parity (PPP) basis crosses about US$ 4,500. At present, the PPP per capita income for India is around $ 3,500 and is slated
to reach this threshold in the next 4-5 years. As a result, the Indian automobile industry is expected to emerge as one of the
fastest growing markets in the world over several years.

The auto components industry is expected to grow by 16-18% in FY12. A moderation in domestic auto production after 2 years
of strong growth will lead to a relatively lower OEM demand for auto components. Also a revival in global auto production and
increasing penetration of companies in key export markets is likely to push growth in this industry.

Outlook on size and growth in Auto Component industry
                                Proportion of                            Growth           Proportion of                                 Growth
Particulars                              total     Size in Rs. Bn       2011-12E                   total       Size in Rs. Bn          2012-13E
Domestic Consumption
- OEM                                  70.5%                1334              18.0%               70.8%                 1516                   14%
- Replacement                          29.5%                 557              10.0%               29.2%                  624                   12%
Total                                 100.0%                1891              15.0%              100.0%                 2140                   13%
Domestic Production
- OEM                                  72.6%                1334               18%                72.5%                 1516                   14%

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- Replacement                       15.4%              283                 8%             14.3%               299                 6%
- Exports                           12.0%              221                23%             13.2%               276                25%
Total                              100.0%             1838                17%            100.0%              2091                14%
                                                                                                             (Source: CRISIL Research)

Short-term operating margins to remain under pressure as input costs continue to rise
The basic raw materials are estimated to remain firm in FY12. Though a portion of this increase has already been passed to
OEMs, the operating margins are estimated to decline by 110-120 bps in FY12. Further, a surge in demand for automobiles
has constrained capacities, thereby forcing auto component manufacturers to invest more in capacity expansions. Thus ROCE
is likely to decline in the medium term.

Although two and three-wheelers, along with passenger cars, account for two-thirds of the components manufactured,
commercial vehicle components have shown the fastest growth rate over the last five years. Among the products, engine parts
lead the industry with almost 31% market share followed by drive transmission and steering parts, at 19%. Other products like
body and chassis parts, suspension and breaking parts, equipments and electrical parts also contribute significantly to the
overall industry turnover. India’s share in the world auto components too is likely to grow to over 3% by 2015-16, while it was
mere 0.4% in 2003-04.

Quarterly Performance:
                                                                                                                               Rs. Cr.
Particulars                   Q2FY12     Q2FY11       % Chg    Q1FY12           % Chg    Q4FY11    % Chg        Q3FY11        % Chg
Gross Sales                     175.1      138.3      26.6%      173.4           1.0%      171.6     1.0%         151.7       13.1%
Excise Duty                      13.1       10.8      21.6%       12.5           4.8%       14.8   -15.2%          12.6       16.9%
Net Sales                       162.0      127.5      27.1%      160.8           0.7%      156.9     2.5%         139.1       12.8%
Raw Material Consumed           120.0         94.3     27.2%      123.1       -2.6%        115.5     6.7%            105.0     10.0%
Stock Adjustment                  1.5         -0.3   -621.4%       -1.5     -199.3%         -0.6   137.1%              0.1   -788.9%
Employee Expenses                 6.8          4.9     40.2%        6.0       13.6%          6.2    -2.1%              5.1     19.6%
Other Expenses                   19.5         19.4      0.6%       19.3        0.8%         20.0    -3.3%             19.3      3.5%
Total Expenditure               147.7        118.3     24.9%      147.0        0.5%        140.9     4.3%            129.5      8.9%
EBIDTA                           14.3          9.2     54.9%       13.9        3.1%         16.0   -13.2%              9.6     65.8%
EBIDTA Margin%                  8.8%         7.2%                 8.6%                    10.2%                      6.9%
Other Income                      1.0          0.3   248.3%         0.9          9.8%        0.7    26.0%              0.3    192.0%
Interest                          2.0          0.8   149.4%         1.5         32.2%        1.4     8.8%              1.1     25.7%
Depreciation                      2.6          2.0    34.7%         2.5          6.9%        2.3     7.4%              2.0     15.0%
PBT                              10.7          6.8    58.0%        10.8         -1.2%       13.0   -16.9%              6.8     91.9%
PBTM%                           6.6%         5.3%                 6.7%                     8.3%                      4.9%
Tax                               1.0          2.1    -54.5%        0.7         43.9%        2.3   -71.2%              1.2     90.8%
Effective Tax Rate%             8.9%        30.9%                 6.1%                    17.6%                     17.7%
Reported Profit After Tax         9.7          4.7   108.4%        10.2         -4.1%       10.7    -5.3%              5.6     92.1%
Extra-ordinary Items              0.0          0.0     0.0%         0.0              -       0.0         -             0.0          -
Adjusted Net Profit               9.7          4.7   108.4%        10.2         -4.2%       10.7    -5.3%              5.6     92.1%
NPM%                            6.0%         3.7%                 6.3%                     6.8%                      4.0%
EPS                               1.9          0.9   108.4%         2.0         -4.2%        2.1    -5.3%              1.1     92.1%
Equity                           10.0         10.0     0.0%        10.0          0.0%       10.0     0.0%             10.0      0.0%
Face Value                          2            2     0.0%           2          0.0%          2     0.0%                2      0.0%
                                                                                                                     (Source: Company)

Net Sales grew by ~27% in Q2FY12 to Rs.175 cr. EBIDTA margins too expanded by 160 bps to 8.8% on account of higher
raw material cost and other expenses as percentage of sales. Net profit doubled to Rs.9.7 cr in Q2FY12 from Rs.4.7 cr in

Risks and concerns:
Rise in raw material costs:
FY11 witnessed a strong increase in commodity prices going above the previous record highs of 2008. Even FY12 is expected
to see a firming up of prices in the international market. While this could put pressure on margins, the management is
continuing to focus on cost re-engineering to minimize the impact of this development.

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Hike in fuel prices and alternate fuels:
With the price of crude oil rising significantly over the past few months, the price of automotive fuel is likely to face upward
pressure. While increase in prices of fuel brings about some shift in auto sector – from 4-wheeler to 2-wheeler – continuous
price increase in fuel could act as a dampener even for the 2-wheelers from which MAIL derives major part of its sales.

Financial market conditions:
With the unabated threat of inflation, RBI has raised its policy interest rates significantly in last 18 months. Availability of credit
and affordable interest rates are important facilitators for automobile industry and the two-wheeler segment within it. The
recent rise in financing rates could impact demand in automobile industry across all its segments.

High dependence on Hero Motor Corp:
MAIL derives ~60-70% of its sales from HMCL. However, if the company cancels any of its orders it could affect MAIL’s future

Dependent on fortunes of automobile industry
The fortunes of the auto ancillary sector are closely linked to those of the auto sector. Demand swings in any of the segments
(cars, two-wheelers, commercial vehicles) have an impact on auto ancillary demand. Demand is derived from original
equipment manufacturers (OEM) as well as the replacement market.

Competition - organised and unorganised
MAIL faces intense competition from organized and unorganized players in the sector. There are 402 medium and large key
players in auto components in the organised sector along with 6000 ancillary units. In the unorganised sector there are
approximately 5000 SSIs.

MAIL is a fast-growing Hero Group company manufacturing superior light engineering automotive products. The large capex
(Rs.4,500 cr to be spent over the next 5 years) initiated by HMCL could result in substantial business upside for MAIL, which in
turn could increase its sales and profitability substantially going forward.

Capex incurred by MIAL and expected volume growth by HMCL augur well for MAIL. After FY11 expansion (from 36 lac units
to 60 lac units) capacity expansion is still at 75.3% showing scope for rise in utilisation. Though OPM of MAIL is low, low tax
rate results in a decent NPM.

At the CMP, the stock is trading at 4.6x FY12E EPS of Rs.7.9. We recommend buying the stock at the CMP with a target of
Rs.41.5 (5.25x FY12E EPS).

Quick Estimates
Particulars                                          FY09                      FY10                     FY11                     FY12E
Operating Income                                     235.1                     290.7                    519.8                     651.0
PBIDT (before other income)                           19.8                      27.2                     43.3                      56.0
PBIDTM%                                              8.4%                      9.4%                     8.3%                      8.6%
PAT                                                   11.1                      15.8                     25.3                      39.7
PATM%                                                4.7%                      5.4%                     4.9%                      6.1%
EPS                                                    2.2                       3.2                      5.1                       7.9
PE (x)                                                16.3                      11.5                      7.1                       4.6
* Quick Estimates                                                                                  (Source: Company, HDFC Sec Estimates)

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Technical View:

MAIL has been consistently making higher bottoms and higher tops since March 2011 after the stock touched a low of around

Upmoves after March 2011 have been accompanied with higher than average volumes, which indicate significant
accumulation has been happening in this counter.

During a major period of this upmove, the stock was trading above the 200-day EMA, which is a bullish sign. The 200 day
EMA is currently around Rs.32, indicating strong support for the stock at this level.

The stock is consolidating between the 34 and 40 levels for the last six weeks. With the 14-day RSI climbing and not in the
overbought territory and the stock trading above the 13-day simple moving average, the odds do seem higher that the stock is
heading higher in the weeks to come.

Our immediate upside targets for the stock is at 41. This is the 38.2% retracement level of the fibonacci extension move of
19.72 to 37 drawn from 30.46. Stop loss can be placed at 34, which is the low end of the 34-40 trading range in which the
stock has been trading within.

Analyst: Sneha Venkatraman (
RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 3075 3435
Corporate Office: HDFC Securities Limited, I Think Techno Campus, Building –B, ”Alpha”, Office Floor 8, Near Kanjurmarg Station, Opp.
Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Tel: (022) 30753400 Fax: (022) 30753435 Website:

Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation.
This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a
solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or
complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities
referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this
document. This report is intended for Retail Clients only and not for any other category of clients, including, but not limited to, Institutional

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