Dear Friends,
We are recommending Buy on our Actionable ViewPoints "GNA Axles" as per following:-
CMP: Rs 381 Target: Rs 457 (20% Upside)
Key Points:
GNA Axles: Viewpoint – On a Strong Footing
· North American markets to drive exports revenue; Set to outpace industry growth: Exports of GNA Axles Limited (GNA) account for ~50.5% of its revenue. The company caters to the commercial vehicles (CV) and tractors segments in exports markets. CV exports constitute ~40% of the topline, while tractors constitute ~10%. North America class 8 truck sales have been showing strong growth momentum in the current fiscal (April – October 2018) and have almost doubled on a y-o-y basis, which augur well for GNA axles. Going ahead, GNA's consistent efforts in the past to add new customers (OEM and tier-1 suppliers) in export markets coupled with focus on enhancing content per vehicle is likely to yield good results and would make up for the likely moderation in class 8 truck demand. Management has pointed at new client wins in the next fiscal, as most vendor contracts in the industry would come up for renewal. (GNA expects new customer wins based on good quality products, competitive pricing, established brand). Incremental revenue from new customers and focus on increasing content per vehicle would lead to sustained strong double digit growth in the CV exports segment. We expect GNA's overall topline to clock a 15% AGR over FY2019E-FY2021E, which is ahead of the expected industry growth.
· Entry in new segment – SUV to open up new growth avenues; to de-risk the business from the highly cyclical CV and tractor business: GNA is broadening its product profile by developing shafts for the SUV segment. GNA will tap its existing client base, both in the domestic as well as export markets, catering to the sports utility vehicle (SUV) segment. Given its longstanding relationships with original equipment manufacturers (OEMs), GNA is confident of securing supplies for the SUV business. The company is looking to commence commercial production in March 2019 and expects it to ramp up over the next two years. Established relationships with OEMs and tier-1 suppliers in North American and Indian markets would help scale up revenue in the new segment. We have built in revenue of around Rs. 50 crore from the SUV segment in FY2020, which is likely to increase going ahead. GNA's entry into the SUV segment (passenger segment, which has relatively stable growth rates) will de-risk the company from the highly cyclical CV and tractor businesses.
· Operating leverage and depreciating INR to offset the impact of higher raw-material prices; OPM to remain steady around current levels: GNA is confronting cost pressures due to higher raw-material costs, especially that of steel. Q2FY2019 results are reflective of the same. Cost pressures are likely to sustain in the near term, however operating leverage (aided by strong double-digit topline growth) coupled with INR depreciation against USD (being an exporter, a depreciating INR is beneficial for GNA) would enable the company to offset cost pressures. Moreover, a higher share of lucrative exports augurs well for operating margins. We expect GNA's margins to be steady at around 15.4% levels over the next two years
· Outlook: Well poised to outpace industry growth over the next 2-3 years: GNA's export business is all set to report strong double-digit growth over the next 2-3 years on account of new customer wins and focus on increasing content per vehicle. The domestic business is also expected to grow at a healthy pace. Moreover, entry into the new SUV segment is expected to provide a new growth avenue and would start contributing to the company's topline from FY2020.
· Valuation: Re-initiate viewpoint coverage with a Positive view with 18-20% upside: We had booked profit with stellar 52% returns in our earlier viewpoint report (dated April 16, 2018) and downgraded the stock to neutral at the level of Rs. 550, post which the stock has corrected by close to 30%, thus risk-reward has become more favourable at current levels. We have introduced our FY2021E estimates in this note and expect a 19% earning CAGR over FY2019- FY2021E. The stock trades at PER of 11.5/9.5x based on FY2020/FY2021E estimates. Strong earnings growth, improving balance sheet strength with better cash conversion coupled with impressive return ratios give us comfort for investment in the stock. We re-initiate our viewpoint coverage on the stock and expect an 18-20% upside in the next 8-10 months.
Regards,
F1,Achyuta,111,bharathidasan salai,
Cantonment
Trichy-620001
Tel:04314000706
Ph:8144517351
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