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1 GWM
Edelweiss Investment Research
GNA Axle Ltd (GNA) is one of the leading manufacturer of Medium & Heavy Commercial Vehicles (M&HCV) as well as Off Highway Vehicles (OH) axle
shafts and spindles having dominant share of ~60-65% in domestic market and significant presence in leading economies globally. In FY17, sharp drop in
North America heavy truck demand pulled down export business of GNA; however healthy rise in domestic business helped to offset the concern to some
extent. Going ahead in near term we estimate strong growth momentum in North America heavy truck market will drive growth for export business, while
healthy domestic demand outlook to fuel rise in company’s domestic business.
Strong presence in both exports and domestic market provides significant competitive edge
GNA has significant presence in leading economies like North America and Europe. Strong recovery in USA heavy truck market in FY18 helped company
to register strong growth in first two quarters of FY18. We estimate export business to grow at a CAGR of ~18-20% during FY17-FY20E period. While strong
presence in domestic market will help GNA to bag new orders and help GNA to scale up domestic business from these levels as well and register growth
of ~10-11% CAGR in next 3 years.
Cost reduction measures and new initiative to fuel rise in both topline and profitability going ahead
GNA has consistently bagged orders in exports and domestic market. The current order book is more than INR 800 cr. In addition GNA plans to enter
SUV/pickup truck and LCV axle shaft business which is more than 4x opportunity size in exports and 1x in domestic market, ensuring strong revenue visibility.
GNA also plans to further scale up the profitability by focusing on producivity improvement measures, which will help company to improve margins by 80-
100 bps and subsequently ROCE from current levels.
Valuation
Key drivers envisaged to spur GNA are: 1) healthy CV and tractor domestic and exports demand; 2) cost reduction measure; 3) plans to enter high
realization SUV and LCV segment. We initiate coverage on the stock with ‘BUY’ recommendation and target price of INR 455 based on 17x FY20E earnings.
The stock is currently trading at 20x, 17x and 14x in FY18E, FY19E and FY20E earnings, respectively.
Year to March FY16 FY17 FY18E FY19E FY20E
Revenues (INR Cr) 509 513 615 694 785
Rev growth (%) 18.2 1.0 19.7 12.8 13.1
EBITDA (INR Cr) 81 78 96 112 128
Net Profit (INR Cr) 25 28 41 47 57
P/E (x) 22.8 29.2 19.9 17.2 14.1
EV/EBITDA (x) 8.6 10.8 8.8 7.5 6.3
RoACE (%) 20.1 18.7 18.0 19.0 21.3
RoAE (%) 19.9 12.7 12.9 13.3 14.4
Long Term Recommendation: GNA Axles Ltd
Growth momentum to strengthen going forward…
CMP INR 377 Target INR 455
Rating: BUY Upside: 20%
Bloomberg: GNA:IN
52-week range (INR): 421.55 / 176.35
Share in issue (cr): 2.1
M cap (INR cr): 808
Promoters (%) 70.65
Avg Daily Vol
BSE/NSE (000’) 161.47
Vishal Srivastav
Research Analyst
GNA Axles Ltd.
2 GWM
Recovery in leading export markets combined with continued healthy scenario in domestic market of M&HCVs and OH is expected push topline in
near to medium term period (i.e. ~15% CAGR in FY17-20 period). Focus towards productivity improvement by increasing automation is expected
to further improve margins. From medium to long term perspective, GNA’s entering SUV/pickup truck and LCV business in next 15-18 months will
help to de-risk cyclicality in current user industry and will open significantly large opportunity size for the company. At a valuation of 14.1x FY20E
P/E, increasing RoCE (from 19% in FY17 to 21% plus in FY20E) and dropping debt equity (from 0.4x in FY17 to 0.03x in FY20E) is comforting and gives
significant scope for improvement in valuation upside)
Recovery in existing export
markets and increasing
presence in new market.
Healthy scenario in
domestic market
Strong process ensures
healthy margin levels
Healthy margins, lower
reliance on debt to keep
ROCE strong and hence
benefit valuation
FY17 FY18E FY19E FY20E
Revenue 514 615 694 785
EBITDA 78 96 112 128
EBITDA Margin 15.3% 15.6% 16.1% 16.3%
PAT 28 41 47 57
FY17 FY18E FY19E FY20E
RoACE (%) 18.7 18.0 19.0 21.3
Debt to
Equity (x)0.4 0.2 0.1 0.03
Multiple Price Target
GNA
Axle
17x P/E 455
18x P/E 505
Entry = INR 377PAT CAGR of 29%
over FY17-FY20E
Total
Return of
20%
GNA Axles Ltd.
3 GWM
Price Target INR 455
We value the stock at a 2 year forward PE multiple of 17x based on healthy RoCE of 21% and EBIDTA
margins of 16.3% in FY20E. We recommend ‘BUY’ with a TP of INR 455
Bull
19x 2020E EPS
INR 505
Taking a view on FY21 and FY22, when GNA’s new initiative in SUV/pickup trucks and LCV business will
achieve a sizeable portion in overall business and also in the industry, it will fuel significant addition to
the overall topline. Hence we believe significant value accretion can happen through new facility,
which can result into a bull case multiple of 19x and price target of INR 505, an upside of 35% from CMP
Base
17x 2020E EPS
INR 455 We value the stock at a 2 year forward PE multiple of 17x based on healthy RoCE of 21% and EBIDTA
margins of 16.1% in FY20E. We recommend ‘BUY’ with a TP of INR 455
Bear
13x 2020E EPS
INR 330 Keeping the financial projections constant and valuing the stock on a 2 year forward PE multiple of 13x,
gives target price of INR 330, downside limited to 12% from CMP
GNA Axles Ltd.
4 GWM
Focus Charts
Average Daily Turnover (INR cr) Stock Price (CAGR) Relative to Sensex, CAGR (%)
3 months 6 months 1 year 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
3.93 2.41 1.38 90% n.a. n.a. n.a. 65% n.a. n.a. n.a.
Bu
sin
ess
Va
lue
Driv
ers
Nature of Industry Axle shafts and spindles is a niche segment in auto component industry that are used in the mobility of a vehicle. Although these
components are import, it is not technology intensive.
Opportunity Size GNA’s manufactures axle shafts for M&HCVs and OH vehicle categories. The current opportunity size of this product line in domestic
market is close to INR 450 cr and GNA has around 60-65% market share in this product line. While opportunity size in its current export
market is close to INR 1900-2000 cr in the current product line.
Capital Allocation GNA is funding the ongoing capex of INR 90-100 cr through internal accruals only. The company has a net cash of INR 72 cr as on date.
GNA plans to become net debt free company in next 2 years.
Predictability GNA’s business is cyclical in nature and entirely depends on demand cycles in M&HCV and OH vehicles both in domestic and international
markets.
Sustainability Pre-qualifications criteria are tough to achieve, hence repeat orders are high. Also, GNA is among very few manufacturers globally in its
current product line that has capability in supplying full finished axle shafts.
Disproportionate Future Recovery in leading export business on the back of revival expected in key international economies, combined with strong growth
estimated from new exports destinations and healthy scenario in domestic market to drive growth in topline. Further continued
productivity measurement through modernisation of manufacturing facility will lead to improvement profitability
Business Strategy &
Planned Initiatives
Strengthening footprints globally, continue to extend dominance in domestic market and thrust towards productivity improvement will
fuel growth to topline and profitability. Plan to enter in SUV/pickup trucks and LCV business opens new growth avenues for the company
and provide cushion on highly cyclical M&HCV and OH business
Near Term Visibility Recovery in key export economies and healthy demand scenario M&HCV and OH demand expected in drive growth for GNA’s topline
Long Term Visibility Diversify regional presence by venturing into un tapped markets, adding SUV/pickup trucks and LCV axle shafts in its product offerings
will not only dilute concentration risk but also de-risk from the highly cyclical M&HCV and OH business.
GNA Axles Ltd.
5 GWM
Focus Charts – Story in a nutshell
Revenue trend: Focus on exports aided significant scaling up of the topline in
the last 5-6 years
Heavy truck segment dominates exports, while OH leads domestic business
Exports business: Focus on new geographies, to provide cushion from
volatality in existing markets going forward
Revival in traditional markets coupled with strong growth in emerging markets
to drive growth
Health scenario in domestic user segment to drive healthy growth in GNA’s
domestic business
Focus towards expanding export footholds and productivity improvement
fuelled growth in topline and profitability
Source: Company, Edelweiss Investment Research
0
100
200
300
400
500
600
FY12 FY13 FY14 FY15 FY16 FY17
INR
(in
cr)
Domestic Sales Export Sales
399 349404
430
509 513
65% 66% 64% 52% 49% 54%
CAGR FY12-FY17
Domestic business: 1%
Exports business: 11%
26%
77%
74%
23%
Exports
Domestic
OH M&HCV
35%47%
50%34%
4% 9%11% 8%
0%
20%
40%
60%
80%
100%
FY16 FY17Europe N America S America APAC (excl india) Australia
19%
-40%
125%-35%
Growth
260234
280336
405
26%
-10%
20%
20% 22%
-20%
-10%
0%
10%
20%
30%
0
100
200
300
400
500
FY16 FY17 FY18E FY19E FY20E
INR
(in
cr)
Export revenues YoY growth (RHS)
233 255 305 324 342
11% 9%
20%
6% 10%
0%
10%
20%
30%
0
100
200
300
400
FY16 FY17 FY18E FY19E FY20E
INR
(in
cr)
Domestic revenues YoY growth (RHS)
509 513 615 694 785
16.0% 15.3% 15.6% 16.1% 16.2%
4.9% 5.4% 6.6% 6.8% 7.5%
-6%
4%
14%
24%
0
500
1000
FY16 FY17 FY18E FY19E FY20E
INR
(in
cr)
Overall Revenue (LHS) EBITDA margins PAT margins
GNA Axles Ltd.
6 GWM
Dominance in the domestic space and sizeable presence in
leading economies have been the growth drivers for GNA Axles GNA Axles Ltd. is the leader with around 60-65% share (FY17) in OH and
M&HCV axle shafts in the domestic market.
Over the years, GNA has effectively consolidated its position in the domestic
market by supplying to all the leading players (such as Automotive Axle, M&M,
TAFE, John Deere, Dana India, Bharat Benz etc.).
GNA’s ability to scale up its operations, increase its customer base in
international markets, coupled with efforts to adhere stringent delivery
schedules, enhancing both product quality and its manufacturing process
has helped the company grab a significant share in the exports market.
Revenue trend: Focus on exports aided significant scaling up of the topline in
the last 5-6 years
Source: Company and Edelweiss Investment Research
Axle shafts and spindles are critical components for the mobility and least
affected from technology disruption
An axle shaft is a critical component in the axle and chassis assembly of any
type of vehicle. A commercial vehicle axle assembly is of the semi float type
wherein the axle shafts and spindles are attached together to the main axle,
whereas for tractors, which have the full float assembly type, the axle shaft is
directly attached to the main axle.
Even in the event of a technology disruption hitting electric vehicles, the axle
shafts and spindles will not face any threat, as these vehicle mobility
components essential for driving any kind of vehicle.
Snapshot of axle shafts, spindles and their position in the axle assembly
Source: Edelweiss Investment Research
Although line of products are same for domestic and export markets, mix vary
across both businesses
GNA’s product mix vary across its exports and domestic business. For example
M&HCV segment dominate the export revenue pie with around 74% share,
while OH dominates in domestic market with around 77% share in domestic
business.
Heavy truck segment dominates exports, while OH leads domestic business
Source: Edelweiss Investment Research and Company reports
0
100
200
300
400
500
600
FY12 FY13 FY14 FY15 FY16 FY17
INR
(in
cr)
Domestic Sales Export Sales
399
349
404430
509 513
65% 66% 64% 52% 49%54%
CAGR FY12-FY17
Domestic business: 1%
Exports business: 11%
26%
77%
74%
23%
Exports
Domestic
OH M&HCV
GNA Axles Ltd.
7 GWM
1. Consistent product quality and ability to effectively sustain
pricing pressure has been key to success in exports market
The company has been able to enhance its global footprint over the last 5-6
years, this is evident from the fact that GNA’s exports business has grown at a
CAGR of ~11% during the years FY12 to FY17. Ability to meet stringent quality
norms with stiff pricing pressure has been key success factor.
Consequently the share of exports saw a significant rise from around 35% in
FY12 to 53% in FY16, before dipping to 48% in FY17.
Consistent quality helped GNA to establish its foot holds in key export markets
Source: Company reports
Ability to bag consistent orders from global leaders indicates preference for
GNA globally
GNA Axles has been able to bag orders from all major global biggies that utilize
axle assemblies in the heavy commercial vehicle space and OH vehicles. This
is an indicator of GNA’s acceptance in the global space in terms of product
quality and timely delivery.
Currently, GNA has a total order book of more than INR 800 crore ensuring
healthy revenue visibility for the company.
GNA has bagged orders from global biggies – A key positive
Source: Company
Limited competition in its current business line even in global space helped
GNA establish its stronghold in the leading economies
Although GNA has been consistent with its quality and delivery schedules, an
additional positive has been the limited competition in its line of business that
has helped company to establish strong foot hold in leading markets such as
North America and Europe.
There are 2-3 players in the global M&HCV and OH vehicle space that have
capability of supplying fully finished axle shafts. Hence a significant portion of
the demand is met by small semi-finished product suppliers where OEMs or
axle/chassis assemblers do final machine job work in house.
GNA’s ability to retain its market share even in challenging scenario is
encouraging
Note: For calculating market share GNA’s user segment i.e. M&HCV and OH have only been considered
Source: Company and Edelweiss Investment Research
136 117 143 206 262 234
35% 34%36%
48%53%
48%
0%
10%
20%
30%
40%
50%
60%
0
50
100
150
200
250
300
FY12 FY13 FY14 FY15 FY16 FY17
INR
(in
cr)
Export revenues Export share in revenues (RHS)
Meritor HVS,
50%
Dana, 25%ZF, 5%
Kabota, 5%
Transaxle
USA, 5%
Axle
technologies
, 4%
Others,
6%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
FY16 FY17 FY16 FY17 FY16 FY17
N America Europe APAC (excl India)
Un
its
(in
mn
)
Competitors supply GNA Axle supply
24% 23%27% 28%
2%2%
GNA Axles Ltd.
8 GWM
A sharp decline in dispatches to North America has drawn down GNA’s exports
business in FY17…
North America has been a major export market for the company contributing
~50% to GNA’s exports business in FY16. However, as North America’s M&HCV
demand plummeted by a sharp 18% during the same period, GNA’s dispatches
to North America fell by a sharp 40% yoy.
Nevertheless a healthy rise in dispatches to Europe, South America and Australia
provided some respite to GNA’s exports business in FY17.
Sharp decline in North America business pulled down overall exports
Note: The above chart depicts growth of GNA’s user segments i.e. M&HCV and OH have only been
considered
Source: Edelweiss Investment Research
Revenue share: Focus on new geographies, to provide cushion from volatality
in existing markets going forward
Source: Company reports, Edelweiss Investment Research
… however, recovery in North America’s heavy trucks demand in FY18 – a key
positive for GNA’s exports business
North America’s heavy trucks retail sales has observed a rise of ~33% in (Apr-
Oct 2017). Healthy growth in North America’s heavy trucks sales from the start
of FY18, fuelled growth for company’s exports business in FY18.
North America and Europe heavy truck retail sales growth shows healthy
momentum
Source: ACEA, Bloomberg and Edelweiss Investment Research
Europe heavy truck sales registered modest rise of 4% during same period.
Recovery from economic uncertainties post Brexit presents positive scenario
for company’s European business.
GNA is focussing towards increasing presence in new economies like Australia
and South America going ahead, which will not only aid growth but also act
as cushion against sharp volatality in current key markets.
Estimated growth trend in North America, Europe and APAC (excl India)
heavy truck sales
Source: Edelweiss Investment Research
-40%
-20%
0%
20%
40%
60%
FY13 FY14 FY15 FY16 FY17
North America Europe APAC GNA exports business growth
35%47%
50%34%
4% 9%11% 8%
0%
20%
40%
60%
80%
100%
FY16 FY17
Europe N America S America APAC (excl india) Australia
19%
-40%
125%
-35%
Growth
-100%
-50%
0%
50%
100%
150%
Ap
r-11
Ju
l-11
Oc
t-11
Ja
n-1
2
Ap
r-12
Ju
l-12
Oc
t-12
Ja
n-1
3
Ap
r-13
Ju
l-13
Oc
t-13
Ja
n-1
4
Ap
r-14
Ju
l-14
Oc
t-14
Ja
n-1
5
Ap
r-15
Ju
l-15
Oc
t-15
Ja
n-1
6
Ap
r-16
Ju
l-16
Oc
t-16
Ja
n-1
7
Ap
r-17
Ju
l-17
Oc
t-17
Yo
Y G
row
th
Europe truck sales N America class 8 truck sales
0.5 0.4 0.5 0.5 0.50.2 0.2 0.2 0.2 0.3
2.2
2.4 2.5 2.7 2.8
0.0
1.0
2.0
3.0
4.0
FY16 FY17 FY18E FY19E FY20E
Un
its
(in
mn
)
North America Europe APAC
CAGR FY17-FY20E
N America: 9%
EU: 3%
APAC (excl India): 5%
Recovery in heavy
truck sales during first
7 months of FY18
GNA Axles Ltd.
9 GWM
… on the back of new orders, recovery in existing export markets and improvement in market share will post healthy growth in the near-to-medium term.
In addition to a healthy demand scenario in most of its major export markets, we believe there is significant opportunity for market share gains on the back of the
strong current order book of more than INR 800 crore.
On the back of these orders, we estimate the exports growth to be in the range of 18-20% CAGR during FY17-FY20E for its current product line.
Strong growth in emerging markets to diversify regional skewness
Source: Edelweiss Investment Research
Revival in traditional markets coupled with strong growth in emerging
markets to drive growth
Source: Edelweiss Investment Research
50%
35% 40% 40% 40%
35%
50% 46% 44% 42%
10% 9% 9% 10% 12%
4% 6% 5% 5% 6%
FY16 FY17 FY18E FY19E FY20E
North America Europe APAC Others
260 234280
336405
26%
-10%
20%
20%22%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
0
50
100
150
200
250
300
350
400
450
FY16 FY17 FY18E FY19E FY20E
INR
(in
cr)
Export revenues YoY growth (RHS)
GNA Axles Ltd.
10 GWM
II. Leadership in domestic M&HCV and OH space is comforting
Over the years GNA has been able to strenghten its dominance in domestic
M&HCV and OH space by ablity to match stringent pricing pressure and strict
delivery schedules.
In the M&HCV space, GNA has around 35-40% share, as it caters to a significant
share of the axle shaft requirement for Automotive Axles (axle assembler for
Ashok Leyland), Bharat Benz, Eicher and M&M.
While in OH space, GNA’s share is around 80-85%, with major customers such as
M&M, Escorts, TAFE, John Deere and Dana India.
Significant presence in almost all major OEMs lead to dominant position in OH
and heavy truck segments
Source: Edelweiss Investment Research
Despite market leadership, the ability to further scale up market share
consistently – A key positive
A majority of domestic OEMs have at least 2-3 vendors for each component in
order to ensure supply security. Hence for any auto component player to grab
100% supplies of a particular component for any OEM is highly unlikely; this would
restrict the growth opportunity for a component player with a limited product
line.
Being a dominant player, GNA’s ability to constantly gain market share in its
product offerings is commendable. This gain in market share has been on the
back of GNA’s ability to increase its share in both the OH and M&HCV spaces,
combined with benefits arising from share gains by its customers in the M&HCV
space.
Ability to further scale up the market share from current dominant position is
encouraging
Source: Edelweiss Investment Research
Mixed bag for GNA’s domestic business in the last 3 years
Being in the domestic tractor and CV space that is prone to cyclicality, GNA’s
domestic business must face sharp volatility in domestic demand. This can be
concluded from the fact that during FY15, domestic business was impacted
by a sharp slowdown in both M&HCV and tractor demand. In FY16, the
recovery in M&HCV demand helped, whilst a revival in tractor sales benefited
GNA in FY17.
Domestic business trend replicates trend in its user segments
Note: The above chart depicts growth of GNA’s user segment i.e. M&HCV and OH have only been
considered
Source: Edelweiss Investment Research and company reports
39%
86%
61%
14%
M&HCV OH
GNA supplies Competition
1.2 1.4
62%
65%
60.0%
61.0%
62.0%
63.0%
64.0%
65.0%
66.0%
1.15
1.20
1.25
1.30
1.35
1.40
FY16 FY17
Un
its
(in
mn
)
GNA dispatches Market share
-20%
-15%
-10%
-5%
0%
5%
10%
15%
FY13 FY14 FY15 FY16 FY17
GNA Domestic business growth User industry growth
GNA Axles Ltd.
11 GWM
Ability to scale up its market share coupled with healthy trend in user industry
fuelled growth during last two fiscals
Source: Edelweiss Investment Research and company reports
Expectation of an improving domestic market scenario could result in better
near-term prospects
After a slump in Q1FY18, domestic CV demand recovered in Q2FY18. We
estimate H2FY18 to be better than previous year because of the advantage of
the lower base created by sharp drop in demand due to demonetization
annoucement during same period last year. Further FY19 is expected to be a
healthy growth period for the M&HCV sales.
Healthy growth momentum in domestic tractor sales have been key driver for
company’s domestic business during last two fiscals. Further company has been
able to bag new orders in this segment in the Q2FY18, that assures significant
positivities.
Going ahead we estimate, FY19E is expected to observe modest growth
scenario for tractor demand; however healthy M&HCV sales and company’s
ability to gain market share will continue to drive healthy growth for domestic
business.
Riding on buoyancy in the user industry, we estimate domestic business to
grow in the range of around 10-11% over FY17-FY19E for GNA’s current product
line.
Healthy scenario estimated in near to medium term in key user segments…
Source: Edelweiss Investment Research
…to drive healthy growth in GNA’s domestic business
Source: Edelweiss Investment Research
231 260 222 247 279
-12%
13%
-14%
11%13%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
0
50
100
150
200
250
300
FY13 FY14 FY15 FY16 FY17
INR
(in
cr)
Domestic Sales YoY growth (RHS)
0.60.7
0.70.7
0.8
0.3 0.3 0.40.4
0.5
FY16 FY17 FY18E FY19E FY20E
Un
its
(in
mn
)
Tractor production M&HCV production
CAGR FY17-FY20E
M&HCV: 10-12%
Tractor: 5-7%
233 255 305 324 342
11%
9%
20%
6%
10%
0%
5%
10%
15%
20%
25%
0
50
100
150
200
250
300
350
400
FY16 FY17 FY18E FY19E FY20E
INR
(in
cr)
Domestic revenues YoY growth (RHS)
GNA Axles Ltd.
12 GWM
Healthy results in Q2 FY18 has been comforting
Despite slowdown concerns post BS IV and GST implementation, the user industry growth (i.e. tractors and M&HCVs) has risen at a healthy pace in Q2FY18,
indicating positive scenario for the company. GNA domestic business gained significantly from this growth as it registered strong growth of around 34% yoy in
Q2FY18.
Also during this period company has scaled up its market share as it bagged new orders in domestic market that also supported this growth.
GNA’s exports business grew by 16% yoy in Q2FY18. Strong revival in North America heavy truck sales coupled with modest rise in Europe truck demand continued
to fuel exports growth.
However in Q2FY18 company’s EBITDA margins dropped by 90 bps yoy mainly driven by share rise in input prices, nevertheless at PAT level company has been able
to scale up the margins by 110 bps yoy to 6.9% as company has been able to considerably reduce its interest cost.
Q2FY17 Q2FY18 % Growth H1FY17 H1FY18 % Growth
Net sales 130 154 18% 269 299 11%
Raw material cost 80 97 20% 168 187 11%
Gross profit 50 57 15% 100 112 12%
EBITDA 22 24 10% 44 47 6%
PAT 8 11 41% 15 22 42%
Gross margins 38.1% 37.0% - 37.4% 37.5% -
EBITDA margins 16.6% 15.5% - 16.4% 15.6% -
PAT margins 5.8% 6.9% - 5.7% 7.3% -
GNA Axles Ltd.
13 GWM
III. Initiative to enter less cyclical SUV/LCV business – A strategy in right direction
GNA has plans to enter the SUV/pick-up truck axle and LCV shaft business by FY20E. We believe this initiative will help reduce the risk of cyclicality in the CV and
OH businesses.
In the domestic market GNA will be able to cater to bigger SUVs and small commercial vehicles (SCVs), whereas in the export market, it has plans to cater to SUVs
and the pick-up truck industry. Entering into a new product line will help GNA to not only diversify its existing clientele but also to provide the company access to a
much wider market versus the existing business line.
Domestic market: Estimated size of potential market is more than the existing product line, which presents significant growth opporunity for GNA
Source: Edelweiss Investment Research and company reports
Estimated addition to domestic topline, depending on target rise in market share
Domestic SUV/LCV axle shaft market is 30% larger than the size of current
product line of GNA axle.
Even if company is able to grab 5% market share in this product line, the
additional upside from this initiative to the domestic topline will be close
to 8-10%.
Note: The market sizing estimation is done on FY17 domestic sales data of MUVs and LCVs
Source: Edelweiss Investment Research and company reports
1.71.9 1.8 1.8
2.02.2
2.0 2.02.2
2.6
FY13 FY14 FY15 FY16 FY17
Un
its
(in
mn
)
Current M&HCV/OH shaft market Potential SUV/LCV shaft market
CAGR FY13-FY17
M&HCV/Tractors: 4%
SUV/LCV: 5%
25-30 cr
85-90 cr
100-120 cr
Estimated revenue based on target market share
INR
(in
cr)
5 percent 15 percent 20 percentTarget market share ------------------>
5% mkt share
15% mkt share
20% mkt share
GNA Axles Ltd.
14 GWM
For exports business the opportunity size for new product line would be close 4-4.5x as compared to the market size of the existing product line in current market
where GNA is present. We believe entering into SUV/prickup trucks and LCV business, would be a significant growth driver for the company in near to medium term
period.
Current market size and growth in existing product lines in exports business… …Opportunity market size of SUV and pickup truck is more than 4x of current
user segment
Source: Edelweiss Investment Research Source: Edelweiss Investment Research
1.5 1.5 1.7 1.81.31.2 1.2 1.1 1.0 1.0
5.2
5.9 5.7
4.75.2
FY13 FY14 FY15 FY16 FY17
Un
its
(in
mn
)
North America Europe APAC (excl India)
CAGR FY13-FY17E
N America: -3%
EU: -5%
APAC (excl India): 0%
16.818.0
19.720.8
22.0
4.2 4.0 4.2 4.8 5.0
9.9 9.8 9.2 9.0 8.7
FY13 FY14 FY15 FY16 FY17
Un
its
(in
mn
)
North America Europe APAC (excl India)
CAGR FY13-FY17E
N America: 7%
EU: 4%
APAC (excl India): -3%
GNA Axles Ltd.
15 GWM
IV. Healthy order book, focus on productivity improvement and
limited capex will spur growth in both topline growth and margins GNA has been able to maintain a healthy order book on the back of its ability
to bag new orders from global leaders. Currently the order book size of GNA is
more than INR 800 crore — approximately 1.4x its revenue, thereby ensuring
healthy revenue visibility in the near term.
Focus on improving productivity will lead to further profitability enhancement
Overall, in the last 4-5 years GNA Axles has taken various productivity
improvement measures such as increasing automation in the production
process, using electricity instead of furnace oil or diesel, which has resulted in
substantial cost savings in the past.
Going forward as well, the company plans to increase automation across its
different facilities, which will lead to further reduction in labour cost as well as
minimize raw material wastage.
For instance GNA has been able to reduce labour cost by almost 10-15% in one
of its automated forging plants compared with its older manually operated unit.
Focus towards expanding export footholds and productivity improvement
fuelled growth in topline and profitability
Source: Edelweiss Investment Research
FY17 has been challenging for GNA; impacted mainly by a sharp drop in the
export business
Challenging market conditions for the North American heavy truck industry
has significantly impacted the company’s exports business which slid by ~11%
in FY17. The last two quarters (Q3 and Q4 FY17) have been particularly
concerning as GNA’s topline has shrunk by 4% and 5% respectively.
However despite the pressure on topline and rise in input prices GNA has been
able to maintain its EBITDA margin in FY17, while PAT margin improved by ~100
bps yoy to 5.9% on the back of reduced interest cost as the company has
drawn down its debt level.
Despite decent capex, healthy profitability to drive improvement in ROCE and
debt equity
GNA’s plans capex of INR 90-100 cr for next 2 years, mainly towards increasing
the manufacturing capacity of its existing plant from 3 mn to 4 mn units,
automation of existing facility and setting up unit for SUVs axle shafts.
The company will be able to fund this through the remaining IPO proceeds
and internal accruals.
Healthy profitability and low reliance of debt to fund capex is ROCE
accretive
Source: Edelweiss Investment Research
509 513 612 691 785
16.0% 15.3% 15.6% 16.1% 16.2%
4.9% 5.4%6.6% 6.8% 7.5%
-4%
0%
4%
8%
12%
16%
20%
24%
0
200
400
600
800
1000
FY16 FY17 FY18E FY19E FY20E
INR
(in
cr)
Overall Revenue (LHS) EBITDA margins PAT margins 15.2 7.8 70.0 35.0 35.0
FY16 FY17 FY18E FY19E FY20E
INR
(in
cr)
20%19% 18%
19%
21%0.9
0.40
0.22
0.11
0.03
0.0
0.2
0.4
0.6
0.8
1.0
0%
5%
10%
15%
20%
25%
FY16 FY17 FY18E FY19E FY20E
tim
es
RoCE (adj for CWIP and cash)
Debt Equity (RHS)
GNA Axles Ltd.
16 GWM
V. Valuation
With visible signs of improvement for its export business and with the domestic market estimated to remain buoyant in expectation of healthy infrastructure spending
by the government, the company’s topline is likely to head north in near-to-medium term.
Further, introduction of new SUV and LCV offerings in the next two years will likely be topline and margin accretive for the company in the medium–to-long term
period.
For the near-to-medium term, we forecast improvement in EBITDA margins to 15.6%, 16.1% and 16.3% for FY18E, FY19E and FY20E from 15.3% in FY17, and ROCE to
18.0%, 19.0% and 21.3% in FY18E, FY19E and FY20E respectively from 18.7% in FY17.
We recommend ‘BUY’ on the stock, considering the healthy position in current margin, ROCE and debt profile, GNA is currently at a lower valuation versus peers
with a similar profile in the auto component industry. We estimate with healthy growth in current product line, on going productivity improvement drive and
significant opportunity size for new product line will provide considerable upside going ahead.
Peer comparison among our coverage stocks
FY16 FY17 FY18E FY19E
FY16 FY17 FY18E FY19E
Bharat Forge Ltd
GNA Axle
Sales 6809 6396 8123 9910
Sales 509 513 612 691
Sales growth -11% -6% 27% 22%
Sales growth 18% 1% 19% 13%
EBITDA margins 21% 20% 22% 23%
EBITDA margins 16% 15% 16% 16%
PAT margins 10% 9% 11% 12%
PAT margins 5% 7% 7% 8%
Debt Equity 1.0 0.8 0.5 0.3
Debt Equity 0.9 0.4 0.2 0.1
ROCE 15% 11% 18% 24%
ROCE 20% 19% 18% 20%
EPS 28 25.9 39.0 52.0
EPS 16.5 12.9 18.9 22.2
PE 49.6 54.1 36.1 27.0
PE 22.9 29.3 20.0 17.2
Jamna Auto Industries Ltd
Sales 1256 1299 1390 1599
Sales growth 15% 3% 7% 15%
EBITDA margins 12% 14% 14% 15%
PAT margins 6% 8% 8% 9%
Debt Equity 0.07 0.25 0.17 0.14
ROCE 42% 41% 37% 42%
EPS 1.8 2.6 2.7 3.4
PE 24.8 25.2 23.6 18.9
Source: Edelweiss Investment Research
GNA Axles Ltd.
17 GWM
Business Overview Company Brief
GNA Axles Ltd. is the leader with around 60-65% share (FY17) in OH, and M&HCV axle shafts in the domestic market. GNA’s ability to scale up its
operations, increase its customer base in international markets, coupled with efforts to adhere stringent delivery schedules, enhancing both
product quality and its manufacturing process has helped the company grab a significant share in the exports market.
Business Model Axle shaft is a critical component in the axle and chassis assembly used for the mobility of the vehicle. GNA is also insulated from technology
disruption from electric vehicles, as axle shafts and spindles are vehicle mobility component and hence will not face any threat.
Strategic Positioning
GNA Axle has expertise in manufacturing axle shafts and spindles. It has capability of manufacturing axle shafts across different sizes (i.e. from
5 kgs to 165 kgs) to cater requirement for different types of M&HCVs and OH across domestic and export markets. GNA is among very few
player in domestic market and globally which has capabilities of supplying full finished axle shafts in its product line.
Competitive Edge
Among very few player in its product line that has in-house both forging and machining facility
Ongoing automation of old facilities that will enable to reduce material and labour cost
Leading domestic market share of 67-68% and significant presence in leading economies like North America, Europe, APAC, Australia and
South America.
Financial Structure
Strong balance sheet with Cash balance of INR 72cr
Entire capex of INR 120-140 cr planned in next 3 years will be funded through internal accruals and IPO proceeds
Debt is INR 117cr, which it has reduced from INR 153 cr in FY15. It plans to further reduce debt and become net debt free company in next
two years.
Key Competitors Limited competition in domestic markets in same product line, Talbros Eng is the key competitor having market share close to 25-30%. Even in
leading export markets GNA is among very few organized players having capability of fully finished manufacturing shafts
Industry Revenue Drivers Recovery in demand expected in leading export markets, healthy scenario in domestic market to drive growth in near to medium term
Shareholder Value
Proposition
GNA should be looked at as a stock for long term wealth creation as the company having healthy EBITDA margins in a range 16-17%, ROCE
improving to 19% by FY19E from current 18.7%. Decent debt equity ratio of 0.4x in FY17 and plans to become net debt free company in next
2 years. We expect GNA to generate significant return ~20-30% CAGR over next 1-2years
GNA Axles Ltd.
18 GWM
Financials
Income statement (INR cr)
Year to March FY16 FY17 FY18E FY19E FY20E
Income from operations 509 513 615 694 785
Direct costs 355 359 436 486 548
Employee costs 21 27 29 34 38
Other expenses 72 76 83 95 109
Total operating expenses 427 435 519 582 657
EBITDA 81 78 96 112 128
Depreciation and amortisation 27 24 27 36 40
EBIT 54 55 69 75 89
Interest expenses 16 13 10 6 4
Other income 0 3 1 1 1
Profit before tax 38 45 60 70 86
Provision for tax 13 17 20 23 28
Core profit 25 28 41 47 57
Extraordinary items 0 0 0 0 0
Profit after tax 25 28 41 47 57
Minority Interest 0 0 0 0 0
Share from associates 0 0 0 0 0
Adjusted net profit 25 28 41 47 57
Equity shares outstanding (mn) 2 2 2 2 2
EPS (INR) basic 16 13 19 22 27
Diluted shares (Cr) 1.5 2.1 2.1 2.1 2.1
EPS (INR) fully diluted 16 13 19 22 27
Dividend per share 0.0 0.0 1.9 3.3 4.0
Dividend payout (%) 0.0 0.0 10.0 15.0 15.0
Common size metrics- as % of net revenues
Year to March FY16 FY17 FY18E FY19E FY20E
Operating expenses 84.0 84.7 84.4 83.9 83.7
Depreciation 5.3 4.7 4.4 5.3 5.1
Interest expenditure 3.2 2.4 1.6 0.9 0.5
EBITDA margins 16.0 15.3 15.6 16.1 16.3
Net profit margins 4.9 5.4 6.6 6.8 7.3
Growth metrics (%)
Year to March FY16 FY17 FY18E FY19E FY20E
Revenues 18.2 1.0 19.7 12.8 13.1
EBITDA 34.7 (3.6) 21.9 17.0 14.6
PBT 84.8 17.2 34.7 15.9 22.0
Net profit 15.6 10.6 46.7 15.9 22.0
EPS 15.6 (21.8) 46.7 15.9 22.0
Ratios
Year to March FY16 FY17 FY18E FY19E FY20E
ROAE (%) 19.9 12.7 12.9 13.3 14.4
ROACE (%) 20.1 18.7 18.0 19.0 21.3
Debtors (days) 116 130 125 120 120
Current ratio 1.6 2.5 2.2 2.1 2.1
Debt/Equity 0.9 0.4 0.2 0.1 0.1
Inventory (days) 66 78 80 90 90
Payable (days) 122 113 115 115 115
Cash conversion cycle (days) 60 95 90 95 95
Debt/EBITDA 1.6 1.5 0.8 0.5 0.3
Adjusted debt/Equity 0.9 0.2 0.1 0.1 0.0
Valuation parameters
Year to March FY16 FY17 FY18E FY19E FY20E
Diluted EPS (INR) 16.5 12.9 18.9 21.9 26.7
Y-o-Y growth (%) 15.6 (21.8) 46.7 15.9 22.0
CEPS (INR) 34.4 24.0 31.4 38.8 45.2
Diluted P/E (x) 22.9 29.3 20.0 17.2 14.1
Price/BV(x) 4.1 2.7 2.4 2.2 1.9
EV/Sales (x) 1.4 1.7 1.4 1.2 1.0
EV/EBITDA (x) 8.6 10.9 8.8 7.5 6.3
Diluted shares O/S 1.5 2.1 2.1 2.1 2.1
Basic EPS 16.5 12.9 18.9 21.9 26.7
Basic PE (x) 22.9 29.3 20.0 17.2 14.1
Div idend yield (%) 0.0 0.0 0.5 0.9 1.1
Balance sheet (INR cr)
As on 31st March FY16 FY17 FY18E FY19E FY20E
Equity share capital 15.17 21 21 21 21
Preference Share Capital 0 0 0 0 0
Reserves & surplus 123 275 312 352 400
Shareholders funds 138 297 333 373 422
Secured loans 129 117 0 0 0
Unsecured loans 0 0 0 0 0
Borrowings 130 117 72 52 32
Minority interest 0 0 0 0 0
Sources of funds 268 414 406 426 454
Gross block 301 308 378 413 448
Depreciation 153 177 204 240 280
Net block 147 132 175 173 169
Capital work in progress 0 3 5 5 6
Total fixed assets 147 134 180 178 175
Unrealised profit 0 0 0 0 0
Investments 0 0 0 0 0
Inventories 91 110 135 171 194
Sundry debtors 162 182 211 228 258
Cash and equivalents 1 72 37 23 31
Loans and advances 29 31 42 48 50
Other current assets 0 0 0 0 0
Total current assets 283 396 424 470 532
Sundry creditors and others 170 159 194 219 247
Prov isions 5 2 2 2 2
Total CL & prov isions 175 161 196 221 249
Net current assets 108 236 228 250 283
Net Deferred tax -4 -2 -2 -2 -2
Misc expenditure 16 47 0 0 0
Uses of funds 268 414 406 426 455
Book value per share (INR) 91 138 155 174 197
Cash flow statement
Year to March FY16 FY17 FY18E FY19E FY20E
Net profit 25 28 41 47 57
Add: Depreciation 27 24 27 36 40
Add: Misc expenses written off -2 -30 47 0 0
Add: Deferred tax -2 -1 0 0 0
Add: Others 0 0 0 0 0
Gross cash flow 48 20 114 83 97
Less: Changes in W. C. 10 56 28 35 26
Operating cash flow 38 -36 86 49 71
Less: Capex 15 11 72 35 36
Free cash flow 23 -47 13 14 35
GNA Axles Ltd.
19 GWM
Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W)
Board: (91-22) 4272 2200
Vinay Khattar
Head Research
Rating Expected to
Buy appreciate more than 15% over a 12-month period
Hold appreciate between 5-15% over a 12-month period
Reduce Return below 5% over a 12-month period
60
80
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180
Se
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GNA Sensex
Disclaimer
20 GWM
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21 GWM
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22 GWM
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