Buy Automotive Axles Ltd For Target Rs. 1,730 - ICICI Direct
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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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