According to ICICI Direct, The auto ancillary space is witnessing fresh momentum after the downtrend of the last two to three years as most stocks are witnessing a structural turnaround backed by accumulation pattern at the long term support zone, followed by breakout above key resistance area.
ICICI Direct's research report on Automotive Axles
Buy Automotive Axles in the range of Rs 725.00–750.00 for target price of Rs 870.00 with a stop loss of Rs 673.00. Time Frame: Six months
The auto ancillary space is witnessing fresh momentum after the downtrend of the last two to three years as most stocks are witnessing a structural turnaround backed by accumulation pattern at the long term support zone, followed by breakout above key resistance area. The share price of Automotive Axles has generated a resolute breakout above the falling supply line joining the highs since November 2018. This signals a structural turnaround and offers a fresh entry opportunity. The 52 weeks EMA was acting as a major hurdle in the stock in the last two years. It has reversed its role and acted as a strong support during the recent breather (currently at Rs 684) as can be seen in the adjacent chart highlighting strength. We expect the stock to continue its positive momentum and head towards Rs 870 levels in the coming months as it is the 80% retracement of the previous major decline of September 2019 to March 2020 (Rs 1019-336) placed around Rs 870 levels.
Automotive Axles (AAL), a joint venture between the Kalyani Group and Meritor Inc. (US), is the largest manufacturer of rear axle drive assemblies (primarily for CVs) and the second largest brake manufacturer in India. Its product profile includes drive axles, front steer axles, non-drive axles and drum & disk brakes for applications in the M&HCV, off highway and defence segments. The company has recently also ventured into manufacture of light duty drive axles. AAL has a diverse customer base and counts marquee OEMs like Ashok Leyland, Tata Motors, Daimler India, Volvo India, VECV, MAN, M&M, Escorts and Caterpillar in its clientele. Parentage of Meritor (leading global supplier in areas such as drivertrain, braking, mobility and aftermarket for CV and industrial applications) enables AAL to procure strong technological support for its products. The company derives ~90% revenues from the M&HCV space, with second largest domestic OEM i.e. Ashok Leyland alone comprising ~60% of its revenues (as of FY19). The domestic CV industry (M&HCV, in particular) has witnessed sharp deterioration in volumes from FY19 onwards (i.e. ~18 months of decline currently) amid a host of demand-side (slow economic activity, reduced freight movement, tighter credit availability, strain on public transport post Covid) and supply-side (overnight increase in installed capacity due to new axle load norms, high installed based) issues. Historically, it has been observed that the CV space is quite cyclical, with performance linked to overall economic environment in the country and 2-3 years of upturn followed by 1-2 years of downturn. On the balance sheet front, Automotive Axles is a net cash company with a history of profitable operations and robust return ratios with RoCE>20% over FY17-19. It also has a strong cash generation track record (CFO positive in each of the past five years, FCF positive in four of the past five years; present CFO yield at ~17%). With domestic M&HCV cycle expected to bottom out in the next three to six months, we expect the company’s demand prospects to mirror the domestic M&HCV segment cyclical recovery, going forward, over FY22-24E. At the CMP, the stock trades at ~ 28x P/E and ~2.2x P/B on FY20 numbers.
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