GNA Axles Ltd (GNAAL) is a Punjab based manufacturer of rear axle shafts, other
shafts and spindles used in on-highway vehicular (including LCVs, MCVs, HCVs,
bus etc) and off-highway vehicular (agricultural tractors and machinery, forestry,
construction equipment, mining etc) segments. In FY2016, the company’s revenue
mix was constituted by domestic and export segments in the proportion of ~45%
and ~55% respectively. GNAAL’s customers include OEMs such as Mahindra &
Mahindra, John Deere, Tractors and Farm Equipment (TAFE) and tier 1 suppliers
to OEMs such as Automotive Axles, Meritor HVS AB and Dana. The company has
two manufacturing facilities, both of which are located in Punjab. It exports
products to various countries across America, Europe and Asia Pacific.
Strong recovery in tractor segment to drive growth: 70% of the company’s
domestic revenue comes from the tractor segment where it holds an ~50%
market share. In the last two years, we have seen de-growth in the tractor industry
due to poor monsoons which has resultantly impacted GNAAL’s domestic revenue
growth. However, during 5MFY2017, we saw a strong (~19% yoy) recovery at
major tractor players, thanks to the optimal monsoon this year. Going forward we
expect the company’s domestic revenue to improve on the back of strong recovery
in the tractor segment.
Strong global footprint: GNAAL’s export revenue is constituted by America
(~49%), Europe (~33%), the Asia Pacific (~18%), and the balance is accounted
by Australia. Exports constitute ~55% of the company’s total revenue. The
company’s major clients include Meritor HVS AB, John Deere, Transaxle
Manufacturing of America, Dana Ltd and Kubota Corporation. The company
reported a strong ~33% export revenue CAGR over FY2013-16; we expect
continuation of healthy growth over the next 2-3 years on the back of low cost
manufacturing advantages in India, the company’s diversified product portfolio,
strong growth in the US market and with the company tapping newer
international geographies.
Consistent operating margin improvement: GNAAL has consistently been
reporting margin improvement over the last five years on back of its effective cost
management strategy and higher composition of exports in the revenue mix which
entail better margins vis-a-vis the domestic market. The company has reported
operating margin improvement from 13.0% in FY2012 to 16.2% in FY2016.
Going forward, we expect GNAAL to continue to deliver a healthy performance
on the operating front.
Outlook & Valuation: In terms of valuations, the pre-issue P/E works out to 12.1x
its FY2016 earnings (at the upper end of the issue price band) which is lower
compared to its peers (Talbros Engineering is trading at 19.5x its FY2016
earnings). Also, GNAAL has a better margin and ROE profile than its comparable
peers. Considering high export revenue composition, expected recovery in
domestic sales and the company’s market leadership position in the tractor
segment; plus, given the relatively attractive valuation proposition, we
recommend a SUBSCRIBE on the issue.

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