Nitin Agrawal Moneycontrol Research
Highlights: - Leadership position in Rear Axle Shafts, Spindles and Splined Shafts - Strong brand with robust clientele - New avenues for growth and strong industry outlook - Reasonable valuations --------------------------------------------------
GNA Axles, a niche player in auto ancillary segment, catering to light & heavy commercial vehicles and off-highway vehicles. Dominant position, strong brand, robust clientele and longstanding relationship with them, new avenues for growth and encouraging latest quarterly finance performance coupled with reasonable valuations make this worth buying for long term.
New growth drivers – foray into SUV and LCV segment
In order to find new growth avenues and drivers for future, GNA has started making inroads into SUV and LCV axle shaft segment. It has planned to set up a facility with initial capacity of 600,000 units which could be increased depending on market demand. GNA is targeting clients from North America, Europe and India in that order. It is planning to start commercial production from March 2019.
Capacity Expansion
GNA plans to add new capacity to cater to rising demand. This additional capacity would strengthen its topline. The management highlighted that it would increase its export capacity by 25 percent by March 2019.
Guidance intact
The management has guided to have a topline of more than Rs900 crore in FY19, as against Rs 670 crore in FY17. GNA expects that its EBITDA margin would remain stable in the range of 14.5-15 percent, going forward.
Dominant position
On the back of niche product category, GNA faces limited competition in its products range. Low competition has helped the company to capture market share and has a domestic market share of around 60-65 percent.
Industry outlook
Strong demand coming in Class 8 heavy trucks in North America on the back of stronger freight growth in the US has augured well for the company in export market. Continued renewal and expansion of fleet coupled with a strong freight environment is supporting demand for trucks in Europe. Additionally, GNA is focusing on expanding its global footprint by targeting other geographies such as Australia and South America which would help de-risk the business from significant dependence on North America and Europe.
The domestic market, however, is facing multiple challenges on the back of deteriorating macroeconomic environment leading to subdued demand for heavy vehicles. We believe that demand would be sluggish in the near term but long-term outlook remains positive on the back of economic growth, rising income levels, lower penetration, government’s thrust on increasing rural income and focus towards infrastructure and construction.
Further, upcoming BS VI emission norms, to be implemented from April 2020, are expected to lead to pre-buying as BS VI compliant vehicles would be expensive than the current vehicles. Additionally, the government’s scrappage policy would potentially lead to the replacement of 200,000-300,000 trucks which are over 20 years old, which would augur well for GNA.
Strong Q2 FY19 performance
Riding well on the growth coming in commercial vehicle segment, GNA posted a very strong 48 percent year-on-year (YoY) growth in net revenue. Net revenue in the domestic market grew 19 percent YoY on the back of strong demand for M&HCV segment and export revenue grew 89 percent, primarily, due to strong growth in North America and European truck market.
Despite a significant rise in raw material (RM), especially steel, prices, the company has been able to maintain its EBITDA margin. In fact, it witnessed a YoY expansion of 33 bps. This is, primarily, due to operating leverage.
Attractive valuations
The company is currently trading at 16.1 and 13.1 times FY19 and FY20 projected earnings, which are very reasonable.
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