GNA Axles-IPO Analysis

About the IPO

Jalandhar based GNA Axles, which is engaged in the business of rear axle shafts, other shafts and spindles used in on-highway and off-highway vehicular segments in India, will open its public offer from September 14,2016 till September 16, 2016. The company will issue total of 6,300,000 shares through its IPO, of which 2,00,000 shares are for eligible employees. GNA Axles to raise Rs 130 crore at price band of Rs 205-207 per share.  

Purpose of the IPO
The company will raise Rs 130 crore through this IPO which will be utilised in purchase of plant and machinery, working capital requirements and other general corporate purposes.

Industry Outlook
The current market size for rear drive axle shafts used in commercial vehicles and tractors produced in India is around Rs 5.2 bn. Axle shafts and spindles are used in commercial vehicles, which includes LCV, MCV, Tractors etc. The current market size for spindles used in commercial vehicles, produced in India is around Rs1.7 bn. 

We see axle shaft and spindle volume to grow at a CAGR of 11 per cent and 12 per cent respectively over FY15-FY20. This demand will come up owing to pick up in demand for LCV and MHCV at five year CAGR of 11-12 per cent due to expected improvement in industrial activity, steady agricultural output and strong focus on infrastructure project execution. On the other side tractor sales are also expected to grow by 8-9 per cent CAGR over FY15-FY20 with increase in farm profitability, focused government reforms in agriculture through agriculture credit, increase in rural development and easy availability of finance. 

Over the past decade, India has emerged as the auto component hub for automakers across the globe, given its relatively lower manufacturing costs. Auto component exports are estimated to record a robust 17-20 per cent CAGR over FY15-FY20 owing to higher automobile production in key target markets and a surge in component sourcing by global automakers from India. A recovery in North America and Europe drives Indian auto component exports. NAFTA region in North America and EU continue to remain key markets for Indian exporters. They are gradually penetrating other geographies like Latin America and South-East Asia. The emergence of South-East Asia is also underscored by India becoming an export hub for many global OEMs.

Company Outlook
GNA Axles is engaged in manufacturing of rear axles, shafts, spindles and other automotive components and supplies to OEM clients such as M&M, John Deere, TAFE, Automotive Axles, Dana Ltd., Meritos HVS AB, Escorts Ltd., and Claas India Private Ltd. Company enjoys leading position in domestic markets with 50 per cent market share. Domestic sales contribute 45.29 per cent in revenue pie; while rest 54.71 per cent is contributed by export sales. Among export markets North America and Europe caters to majority portion in overseas sales. Recently company has entered in Australian market and is expected to expand its share.
  
It has two manufacturing plants in Punjab- Hosiarpur and Kapurthala operating with capacity of 80 per cent in FY16. Top 10 domestic clients contributes to 89 per cent of the revenue in FY16. Company exhibits high entry barrier as it caters to niche product mix. Company is exposed to the risk of concentrated clients, as any drop in clients' business can directly impact earnings of the company.

 


Financial Performance

Company’s top line has increased by 18 per cent to Rs 502.5 crore in FY16 on a yearly basis. Growing export at CAGR of 33 per cent has assisted its topline and bottomline to grow at CAGR of 13 per cent and 75 per cent respectively over FY13-16. EBITDA margin has expanded by 200 basis points to 16 per cent in FY16 vs FY15. Company has higher receivable days, which is exerting pressure on its working capital requirement due to rapidly growing exports.  

Peer Comparison and Valuation

Company has one comparable peer in its group. GNA Axles looks attractive with growing EPS of 17.12 at P/E of 12.09x as compared to its peer Talbros Engineering Ltd. Company also has higher RoNW of 18.77 per cent and healthy D/E of 0.78x. Considering good valuation numbers, we suggest that one can go for the subscription with long term horizon.