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Well placed to play on cyclical recovery in CV space…

About the stock: Automotive Axles (AAL), established in 1981, is largest independent manufacturer of rear axle drive assemblies in India (primarily for CVs, M&HCV).

As of FY20, rear drive axles comprise ~60% of its topline with brakes share at ~20% and other parts comprising the rest

It counts all major OEMs as its clients in CV domain with prominent names being Ashok Leyland, VECV Commercial Vehicles, M&M among others

Q3FY22 Results: The company reported a healthy performance in Q3FY22.

Total operating income for Q3FY22 came in at | 374.4 crore, up 21% QoQ

EBITDA came in at | 34.9 crore with margins at 9.3%, up 210 bps QoQ

PAT for the quarter was at | 19.8 crore, up 95.6% QoQ

Key Company Update: Automotive Axles is co-promoted by Meritor Inc. (global leader in axles especially for heavy trucks) and the Kalyani group (promoters of Bharat Forge) with each entity owning 35.5% stake in the company. At the parent level, Cummins Inc. has acquired Meritor Inc. valuing Meritor Inc. at US$3.7 billion. Cummins Inc. is now expected to be the new co-promoter in AAL.

What should investors do? AAL’s share price has increased at ~18% CAGR from ~| 633 in February 2017, thereby outperforming the Nifty Auto index in that time.

We retain BUY rating given robust growth prospects in the CV space

Target Price and Valuation: We introduce FY24E. We now value the company at a revised target price of | 1730 i.e. 20x P/E on FY24E EPS (earlier TP | 1260).

Key triggers for future price performance:

Sound technology support from ex-parent Meritor Inc. with capabilities in the electric vehicles domain (e-axle for heavy duty trucks)

Cyclical recovery in demand in CV space. We expect sales to grow at a CAGR of ~27.7% in FY21E-24E to ~| 1,888 crore in FY24E

Healthy b/s (net cash positive) and consistent cash generation bode well and are expected to act as a good margin of safety for our investment thesis

Alternate Stock Idea: Apart from AAL, in our auto OEM coverage we like M&M

Focused on prudent capital allocation, UV differentiation & EV proactiveness

BUY with a target price of | 1,125

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