Stock Fundamentals

Automotive Axles: Buy

Parvatha Vardhini C | Updated on December 10, 2011 Published on December 10, 2011

Encouraging CV sales, a strong pedigree, diversified clientele, and attractive valuations are positives.



Compared with the 28 per cent year-on-year growth witnessed in April-November 2010, auto industry growth has indeed taken a beating this year. But unlike the stagnation of 2008-09, the industry has witnessed only moderation in growth, managing to still grow by 13 per cent in April-November 2011. Rising fuel prices, high interest rates and a slowing economy notwithstanding, commercial vehicles (CVs) sales remain encouraging. This scenario is favourable for Automotive Axles, which manufactures single and tandem drive axles, non-drive axles and axle housings and assemblies for the commercial vehicles industry. Axles are used to transmit the driving torque to the wheel and help maintain the position of the wheels. Axles also bear the weight of the vehicle as well as the cargo.

Automotive Axles is a joint venture between Arvin Meritor, US, and the Kalyani Group. Other notable Kalyani group companies include Bharat Forge and Kalyani Steels. With CV sales holding up, a strong pedigree, a diversified clientele, including Ashok Leyland, Tata Motors, AMW, Mahindra-Navistar and Volvo, and attractive valuations make the case for an investment in this stock. At the current market price of Rs 351, it trades at a PE of just 9.4 times its trailing twelve-month earnings. Those with a holding period of not less than two years can buy.

Demand boost

Even as the auto industry growth has moderated, light commercial vehicles, have shown a strong growth of 29 per cent in April-November 2011. Medium and heavy commercial vehicle (MHCV) volumes too have inched up by 9 per cent during this period. Although industrial output remains sluggish, data from the Indian Foundation for Transport Research and Training (IFTRT) shows that truck rentals on trunk routes have remained firm so far. Truck owners have been able to recover increases in diesel and tyre prices and auto financing costs through higher freight rates, thanks to stable cargo availability from small and medium manufacturing enterprises and the demand for movement of food grains/agri commodities. This, along with good agricultural growth, and an expected peaking out of the interest rate cycle (which is expected to trigger industrial activity) indicates that the MHCV volumes will pick up sooner than later. The company will be a beneficiary of these positive trends in the market.

Value additions

Apart from manufacturing axles, the company is also into the production of axle housings and assemblies, making it a complete solutions provider to the auto industry. It supplies 10 per cent of the axle housing requirements of Tata Motors and over 50 per cent of requirements of Ashok Leyland. Moreover, Axle assemblies, being a second step up the value chain, also help margin expansion. The company is currently the largest maker of rear drive axle assemblies in the country and, in addition, makes front steer axle assemblies for low floor buses.

The company has also diversified into the manufacture of drive gears and components for air actuated S-CAM brakes. In January this year, it acquired the brakes business of Kalyani Brakes. With the auto component industry being highly fragmented, an increase in the number of components supplied to an automaker would help improve a supplier's bargaining power. Besides, to further increase its value proposition, Automotive Axles is expanding its product portfolio over the next one year to include two-speed axles, planetary hub reduction axles, high-end coach axles and off-highway axles.

Financials

For the year-ended September 2011, net sales grew year-on-year by 51 per cent to Rs 1012.5 crore and net profits, by about 31 per cent to Rs 57.5 crore. Raw material cost pressures pulled down the operating margins from 13.5 per cent last year to 11.5 per cent this time. However, the current year's numbers may benefit from the flattening of commodity prices.

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