GNA Axels: Strong Q3 FY19 driven by demand; long term outlook positive

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26 Aug, 2025 12:21

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Nitin Agrawal
Moneycontrol Research

Highlights:
- Strong Q3 FY19 performance driven by growth in net revenue
- Business outlook weak in the short term, positive for the long term
- New avenues for growth and diversification across geographies
- Reasonable valuations
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GNA Axles (GNA) posted a stellar set of Q3 FY19 earnings. However, a significant rise in raw material (RM) prices did not let the benefit of operating leverage percolate down to operating profitability. Dominant position, robust clientele, new growth avenues and encouraging Q3 FY19 quarterly finance performance, coupled with reasonable valuations (10.4 times FY20 projected earnings), make this stock worth buying for the long term.

Quarter at a glance
Key positives
Despite recent slowdown in the domestic commercial vehicle (CV) segment and in Class 8 truck demand in North America, the company posted a very strong year-on-year (YoY) growth of 47 percent in net revenue. This is primarily due to its strong order pipeline. The management said it has mitigated risk by diversifying its business into different geographies.

In terms of operating profitability, GNA posted a 45 percent growth in earnings before interest, tax, depreciation and amortisation (EBITDA).

Key negatives
EBITDA margin, however, witnessed a marginal dip (28 bps) due to a significant rise in RM prices, the impact of which was partially offset by operating leverage.

Outlook

Entering into new segments
To further fuel growth and diversify from CV and off-highway segments, GNA has started entering into the SUV and LCV axle shaft segments. The company has chalked out a plan to set-up a manufacturing facility with an initial capacity of 600,000 units. The management is focusing on acquiring customers from North America, Europe and India in that order. Commercial production of this facility is expected to commence from March.

Capacity expansion
In order to cater to rising demand from international markets, GNA plans to increase its export capacity by 25 percent by March.

Industry outlook sluggish in the near term
Falling demand for Class 8 trucks in North America has not yet hampered growth as GNA continues to have a strong order pipeline. The management said order book is strong for Q4 FY19 as well. If weakness in demand continues, then we can expect an impact on the company’s performance as well. The company's strategy of expanding its footprint by targeting other geographies such as Australia and South America is expected to help de-risk the business from significant dependence on North America and Europe.

On the back of a weakening macro-economic environment, demand for commercial vehicles are slowing down. The outlook for the short term is weak, but we believe the long term outlook is very positive on the back of infrastructural development, increasing economic activities, rising rural income levels and lower penetration. In the short term, what could lend support to CV demand is upcoming Bharat Stage-VI emission norms to be implemented from April 2020. The new emission norms are expected to lead to pre-buying as BS-VI compliant vehicles would be more expensive than current vehicles.

Moreover, the management highlighted that the domestic demand for off-highway trucks (contributes around 20 percent to total revenue of GNA) continues to be decent and hence may help company offset the impact of a CV demand slowdown.

Attractive valuationsThe company is currently trading at 12.1 and 10.4 times FY19 and FY20 projected earnings, respectively, which are very reasonable.

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