Karvy Stock Broking has a buy call on Menon Bearings with a target price of Rs 135.The current market price of Menon Bearings is Rs 91.90.Time period given by the brokerage is one year when Menon Bearings price can reach the defined target.Investment rationale by Karvy Stock Broking:Aluminum die-cast plant: Menon has invested Rs 400 Mn towards the enhancement of aluminum division and the facility is expected to be ready by FY20E to cater to increased customer demand.
We believe with enhanced capacities, Menon is in good place to de-risk its product mix.
Considering the strong clientele like Cummins, John Deere new contracts, we are of the positive view about Menons focus on increasing the aluminum segmental share from the current levels of about 30 per cent.
We also expect the segment to witness a faster growth ahead.Strong financials: Net debt to equity of 0.1x in FY18, net working capital to sales at less than 25 per cent and cash per share of Rs 3.3 indicate its balance sheet strength to remain debt free in future while maintaining operational superiority.Valuation and risks: At CMP of Rs 92, Menon Bearings is trading at 17.6x to FY20E EPS.
In view of the recent capacity enhancements, de-risking of product mix and healthy profitability margins, we ascribe a multiple of 26.0x to FY20E EPS (5 year average of one year forward PE) and recommend a BUY rating for a target price of Rs 135 representing an upside of 47 per cent.
We believe that on account of high return on capital at 33.6 per cent over the last 3 years, the company has potential to be re-rated.
Threat of counterfeit products which mainly cater to aftermarket segment (10 per cent of Menon revenues) along with slowdown in industrial automotive segments especially tractor CV sales may pose risk to the call.