Menon Bearings Ltd Research Report By Karvy

Expansion Plans to Complement Higher Demand

Top line growth to continue with new investments:

YTD EPS grew by 18%, as the slight contraction (112 bps) in EBITDA margin was compensated by a top line growth of 17%. We expect the pressure on margin to fade and margins to stabilize around 27% by FY20E. Also, we expect investments made by the firm in new facilities to start paying off by FY20E. We retain “buy” rating with a target price of Rs.150, with an upside of 27%. On account of new client addition together with incremental revenue from its investments made in engine bearing plant & critical aluminum cast plant along with the shift in market dynamics in favor of BS IV, we expect the margins to stabilize by FY20E with EBITDAM, PATM reaching 27.3%, 14.7%, respectively. We also expect incremental revenue from the engine bearing & bushes plant from FY20E and the aluminum division from FY21E onwards.

Robust balance sheet to aid gain market share & profitability:

Net debt to equity of 0.1x in FY17, near zero debt levels, net working capital to sales at less than 25%, cash per share of Rs. 3.0 and interest coverage multiple of 24.6x indicate its balance sheet strength to remain debt free in near future while maintaining operational superiority in gaining market share. The company is expected to meet its capex through internal accruals & debt. Historically, Menon Bearings has been consistently recording a healthy profitability & return ratios; we expect the trend to continue in future with RoE, RoCE reaching 24.0% & 29.8% respectively by FY20E.

Flattish Q3 numbers along with double digit YoY growth:

Menon Bearings revenue, though de-grew by 1.2% sequentially owing to GST after effects, is expected to recuperate upon the macro situation reaching normalcy. Profitability margins have slightly contracted due to marginally higher material & employee costs coupled with slightly higher interest expense. Year to date performance has been impressive with a 16.6% turnover growth. While EBITDA margin has marginally contracted to 25.5%, EBIT margins improved to 22.5% & Net margins have improved to reach 14.8% respectively.

Valuation and Risks:

While introducing FY20E, we have re-visited the FY18E & FY19E financials. At CMP of Rs. 118, Menon Bearings is trading at 22.7x to FY20E EPS. We ascribe a multiple of 29.0x to FY20E EPS and recommend a “BUY” rating for an upwardly revised target price of Rs. 150 representing an upside of 27% for 9-12 months. Threat of counterfeit products which mainly cater to aftermarket segment along with slowdown in industrial & automotive segments may pose risk to the call.