GNA Axles-Poised for growth

[AKGupta]

Hi everyone

This is my first company analysis here and I have much to thank the VP community for enlightening me about companies, sectors etc.

GNA Axles has been listed for around a year (listed in Sept 2016) and much has been publicly written, researched about this company already. So, I am not sure if the company is going to be a multi-bagger in the near term but still I think there is a lot of potential left in this company to outperform (management has guided to doubling of revenues in 3 years).

Company is in the business of manufacturing and selling rear axle shafts and swindles. Axles are an integral part for any kind of vehicle as they aid transmission and mobility. Company has a healthy 50:50 break-up of revenues between domestic and export markets and has a high domestic market share (close to 65%) in supplying axle shafts to tractor OEMs.

Following is historical performance of this company (data taken from the ARs, IPO prospectus and public forums like Moneycontrol):

I. Revenue, Profit and Loss, Margins: FY18 revenue could easily cross 600 crore at current run rate and PAT for FY18 could be 50% higher than last fiscal. Management has said their order run rate is ~60 crore per month.

*FY18E is projected number based on past 3 quarter performance

II. Capacity utilization and expansion: 80 crores fixed investment in Unit 2 planned through IPO proceeds (61 crore has already been done as of Dec’17). Unit 1 had close to 80% capacity utilization in 2017 for real axle shafts and spindles in FY17. Plan is to have 4m pa pieces capacity from current 3m and the new plant to cater to LCV & SUV segment will be ready by end of 2018 CY.

*DNA stands for Data not available

III. Debt analysis: GNA has been repaying debt since 2016 which is good for the bottom line. Target is to be debt free by 2020.
Interest cost for FY18 will be ~7 crore half of FY17 on total debt of ~100 crore.

Key momentum drivers (for the next 3 years):

1. Capacity expansion – 80 crores fixed investment in Unit 2. Unit 1 has 80% capacity utilization in 2017 for real axle shafts and spindles)
2. Improving MHCV demand in key export markets mainly US (A Shortage of Trucks Is Forcing Companies to Cut Shipments or Pay Up - WSJ)
3. Entry into new segments: LCV, SUV axles
4. Road construction schemes like Bharatmala and Sagarmala and rules like e-way bill, mandatory fleet renewal (pending) and growing restrictions on overloading will boost CV demand
5. Paring of debt with IPO proceeds – Company plans to be net debt free in the next 2 years)
6. Low competitive intensity (only one other major player Talbros Engg.)
7. Improvement in rural demand (tractors) with rural initiatives like farm loan waiver, doubling of farmer income
8. Safe from Electric Vehicles disruption

Key positives:

1. High promoter holding (~65%) & management looks stable and honest
2. MF holding (14%)-HDFC, Reliance, UTI etc
3. High domestic market share- ~60-65% in rear axle market for MHCV and tractors

Key risks:

1. Debt unsustainability – They have consolidated ~100 crore debt, mostly short term, in books as of FY17 (albeit this is reducing)
2. Appreciating INR
3. Appreciating steel price (though limited downside as this is passed on to customers with a time lag)
4. Cyclical demand in MHCV and tractor market domestically and heavy truck demand in key export markets (though the company is trying to enter LCV and SUV market which is less cyclical)
5. Bad monsoons impacting tractor demand
6. Rs. 4 crore contingent liability from different tax authorities could materialise and hit PL

Currently the stock is trading at a P/E of 32X FY17 PAT and 21X FY18E PAT.

The key question is can the management execute on its vision of doubling its revenues to 1000 crores by FY20 funded entirely though internal accruals and also be debt-free? I think the answer to that will depend on how successfully company enters into newer markets (South America, Africa), newer product categories (SUV, LCV) and how quickly it expands capacity. Also, it will depend on certain external factors like monsoons, trade headwinds, govt’s rural push. If all goes well, this company could really outperform the broader market.

Till then, I have taken a position in this company with a time horizon of 3 years and will be adding on dips.

Some important links:

1. trucks: Overloading on Tight Leash, Truck Cos Hit the Fast Lane, Auto News, ET Auto
2. http://www.thehindubusinessline.com/companies/postgst-demand-for-light-heavy-commercial-vehicles-to-grow-ashok-leyland/article10046644.ece

[rushikesh.k25]

Nice post @AKGupta,
The company looks interesting but I have some doubts, if you can please clarify

1. Till when the company can enter Lcv & Suv axles segment.
2. What is the market(size) for the same and what is the usp that it will grab other companies market share.(as Lcv and suv segment is kind of new to them, so what is their strategy, to eat others market share or to take market-share from large pie)
3. In their new unit, what capacity they are increasing (segment wise).

[smant]

@AKGupta Thanks for creating a thread on this company. I have few questions on this.

1. Promoter holding used to be ~70% till end of FY17 (source: moneycontrol). Any idea why its down?
2. ~10% of promoter shares are pledged. What is the reason for this. (source: Dec, 2017 shareholding pattern).

I am a newbie and pardon me if these questions seem silly or obvious.

Disc: Not invested.

[AKGupta]

Thanks for your questions guys.

I’ll address your queries to the extent I know over the weekend. I’ve done some work on corporate structure and governance structure of this company to find out if there are any red flags - didn’t come across anything obvious except their high receivables are a bit of a concern. Will be posting it!

Also I’ll be preparing a detailed questionnaire for the company secretary and sending it over the weekend. Will include questions from both of you as even I would also like to know some things directly from them.

Among other things I’ll be asking them to hold a conference call/quarterly presentation on results to improve awareness.

Usually they’re pretty quick in addressing queries so expect a response soon.

[AKGupta]

I have tried to look into possible areas of manipulation, fraud and mis-governance at GNA Axles and have assessed the company on the following dimensions:

I. Mgmt salaries: As seen below, there is a 14% hike in mgmt salaries in FY17. Doesn’t look very high. I read in another VP thread related to triangulation (Forensics and the art of triangulation) , owner mgmt should take their due via means of salaries so that there is no incentive to manipulate and siphon money from the company in any other way.

II.Subsidiary and RPTs:

1. Promoter Rachchpal Singh sold 5 crore property in Greater Kailash, Delhi to GNAA which is 50% amount back in 2015. Rest 50% is owned by Gursaran Singh. This place is used as guest house by the company. Fair value of this place was assessed at 10.5 cr in Nov’15.
   This transaction does not indicate any red flag and there has been no RPT reported in FY17 AR.

2. As far as subsidiaries are concerned, out of a total of 15 odd companies they have, most are dormant with negligible numbers, except GNA Sons and GNA Udyog. I will raise some questions about GNA Udyog particularly since it’s in similar line of business and is incurring losses. Satisfaction with respect to the nature of relationship with these 2 cos is very important:

   

III: Contingent liabilities/off balance sheet items: Read in the same VP thread (triangulation), if a company has actual sales, it is bound to have sales/excise tax issues. As seen below, its contingent liabilities are all related to tax issues. Nonetheless, I will question the mgmt via email on how they are planning to resolve these issues since these have been pending for long (sales tax since 2014 and income tax since 2016) and the amount is material.

IV: Loans and advances to group cos/related cos: There are a couple of group cos (GNA Udyog and GNA GNA Sons) where promoters have made a “security deposit” of approx. 10 crore in 2014. Though they have not made any such deposit after that - meaning they have not used IPO money for this activity. (Could have been a major red flag for me at least particularly because this GNA Udyog is loss making). Nonetheless, in FY17 AR, there is a 1.5 crore addition to this security deposit which I will ask about in my questions.

V: Promoter selling/pledging of shares: As of Dec’17, promoter shareholding is down to 65% from 70% till Sep’17. I will ask in my email about why promoters are divesting the stake. Will also ask about the Rs. 55 crore pledged shares as this would form about 9-10% of their holding. Promoter holding, though, is still high after all this so IMO there is no reason to worry unless this becomes a trend. Below is the break-up of ~65% in brief as of FY17 end:

VI: Dividend and taxation policies: Will ask them about dividend policy going ahead as till now they have not declared any dividends. Company has regularly income and other taxes as reported in the IPO prospectus and FY17 AR.

VII: Receivables and Cash flow position : This is one area where company has scope for improvement. Days sales outstanding has increased from 3 months to 4 months over 4 years from 2013. Out of the total receivables of 182 crore as of FY17, 161 crore is due for less than 6 months. Company should start providing for these receivables IMO which will be a good sign of conservatism. Their Operating cash flow position has also deteriorated a bit in 2017 due to high receivables and inventory. But the CEO has guided for 60 crore a month order book so I am fairly optimistic inventory position will improve. Will include in questions:

I will update the answers to all the questions here. @smant @rushikesh.k25

Based on what I have seen till now and shared here, I think there is still room for this company to grow in the coming 2-3 years and there are no major red flags at present to scare away investors.

Others may weigh in!

[rushikesh.k25]

Thanx for taking the initiative @AKGupta,
Will be waiting for the answers, also ask them what will be the comfortable domestic vs export breakup they want to maintain 2-3years down the line, and which one will be favorable one for them going forward for next 3-5 years.

Regards,
Rushikesh

[AKGupta]

Well guys I have emailed them a couple of times now and recd no response which is unusual given that I recd a response pretty quickly the last time. It may be that my query list was pretty long so co secretary might have been overwhelmed or might be taking more time to respond. But I would suggest somebody else too shoots an email including all the queries above and their own questions and update the response here if they receive any.

Just fyi…there has been more buying in the market by the promoters recently.

[AKGupta]

Recd this response this morning:
"Dear Sir,

The Company as a policy do not entertain individual queries as the same is unfair to other investors. All the necessary information is provided to the Stock Exchanges for dissemination to the Investors.

Regards"

Can someone else try while I look for alternate channels?

[nityanandparab]

Some points from RHP mentioning their key clients.

Page 43
We have a broad customer base for both the on -highway and off-highway segments and our customers are based in India and overseas. Our customers primarily include original equipment manufacturers (“OEMs ”) such as Mahindra & Mahindra Limited, John Deere, Tractors and Farm EquipmentLimited (“TAFE”), and tier-1 suppliers to OEMs such as Automotive Axles Limited, Meritor HVS AB and Dana Limited. In Fiscal 2016, our domestic sales and export sales constituted 45.29% and 54.71% of our revenue from operations, respectively, on a consolidated basis. Our domestic customers in the on -highway segment include major tier -1 suppliers such as Automotive Axles Limited and Dana Limited and HCV manufacturer such as Meritor HVS AB. In the off -highway segment, our domestic customers include major tractor manufacturers such as Mahindra & Mahindra Limited, TAFE, Escorts Limited and Claas India Private Limited. We also export rear axle shafts, other shafts and spindles to various countries including USA, Sweden, Turkey, Brazil, Italy, Germany, Spain, Mexico, Japan, UK, France, China and Australia. Our major global customers include Meritor HVS AB, John Deere, Transaxle Manufacturing of America, Dana Limited and Kubota Corporation.

Page 49
Our top ten domestic customers contributed to 89.29% of our domestic sales for Fiscal 2016 and Our top five overseas customers constituted 80.19% of our export sales for Fiscal 2016
Page 50
Our Company has taken steps towards better utilisation of resources and maximising efficiency by increasing
automation in the forging and machining processes. Our Company uses IT enabled business processes such as advanced computer aided design and analysis capabilities which accommodate a range of customer specifications. Our forging facilities such as screw press with direct drive and extrusion press are supported by robots. We intend to further invest in achieving greater levels of automation by acquiring automatic line for the sawing of round and square bars, fully automatic grinder and polisher and industrial robots such as IRB 7600/500kg. We intend to invest in automation for most stages of our production process to ensure optimal use of resources, reduction of industrial risk to human workers, economies of scale and significantly higher precision in the overall manufacturing and design of products.

Page 118
Domestic consumption of rear axle shafts and spindles demand from commercial vehicles and tractors in India accounts for approximately 2% of drive transmission and steering parts. Further rear axle shaft and spindle find usage in construction equipments and sports utility vehicles (“SUVs”) also. A significant proportion of these components are exported from India as well.

Page 123
We estimate rear axle shaft and spindle volume to grow at a CAGR of 10 -11% and11 - 12%, respectively between Fiscal 2015 and Fiscal 2020 based on:
•LCV demand is expected to increase by 12-13% CAGR during Fiscal 2015 to Fiscal 2020 on the back
of improved private final consumption expenditure (PFCE), growing hub and spoke network,
replacement of 3 - wheelers and ease in CV financing.
•Between Fiscal 2015 and Fiscal 2020, MHCV sales are expected to grow by 10-12% CAGR due to the expected improvement in industrial activity, steady agricultural output and strong focus on infrastructure project execution along with continued capacity constraints in the Railways.
•Over the long term, tractor sales are expect led to grow by 8-9% CAGR, with falling replacement cycles,
stable farm incomes, and increased focus of the government on agricultural and rural development.

Based on that, we project rear axle shaft market size to grow at 13% CAGR for the next five years. In Fiscal 2020, rear axle shaft market size for commercial vehicles and tractors produced in India is projected to be around ₹9,600 million.

Page 135
Our customers include global OEMs and tier -1 suppliers such as Dana Limited (USA, Mexico and Brazil), John Deere (Spain and USA), Kubota Corporation (Japan) and Meritor HVS AB (Sweden, Italy, Brazil, USA), as well as leading Indian OEMs and tier -1 suppliers such as Claas India Private Limited, TAFE, International
Tractors Limited, Escorts Limited, Axles India Limited, Automotive Axles Limited and Mahindra & Mahindra Limited. We have a long standing relationship with Mahindra & Mahindra Limited and John Deere, which are our two largest customers in the off-highway segment in India, and Automotive Axles Limited which is our largest customer in the on-highway segment in India.We have partnered with many of our key customers in the product development process, enabling our products to meet the exact specifications provided by the customers and to ensure repeat orders

revenue from 3 large clients. this is till 2015 as I have picked it from RHP.

I really want to know why Meritor and Automotive Axles India(A JV between Meritor and Kalyani Group) are sourcing the Axles from GNA as they manufacture the Axles on their own.

Disc: Hold a tracking position

[nityanandparab]

Mr. Rachhpal Singh has sold some stake in the month of Dec 2017.

[nityanandparab]

In the competition they have mentioned Talbros, Kross Manufacturers, Embross Autocomp, SPM Autocomp Systems as their main competitors.

I can get the details of Talbros Engineering only which is listed. It is still on low base compared to GNA Axles. It also has lower EBIDTA compared to GNA.

[rushikesh.k25]

That is strange, because we are not asking for price sensitive info, we are just asking some basic questions and trying to understand company business model.
How we can expect the transparency going forward, if they cant even give this basic info?

[AKGupta]

Don’t think this is a red flag though. I would say this is more out of lack of professionalism in the middle mgmt. I’m trying to find a way to directly contact the upper mgmt. Maybe that’ll work!

[AKGupta]

https://www.bseindia.com/corporates/anndet_new.aspx?newsid=1db1eb82-cc5e-47c1-a76d-d134b0ff486c

Taken a term loan of 70 crore to purchase machinery for new unit to manufacture axle shafts for SUV, LCVs etc.

Good for the topline growth. Bad for the target of becoming debt free by 2020.

GNA should really focus on improving receivables position to match the debt servicing obligation.

[S_Banerjee]

I see this 70 cr loan as a very positive sign in terms of company growth.

[AKGupta]

Very good Q4 numbers posted by GNA Axles.
Full year Revenue at 670 crore against 513 crore last year (up 31%).
Net Profit at 51 crores vs 30 crores last year (Net Profit margin at 8% vs 6% last year).
Operating profit at 110 crores (margins at 16% same YoY) vs 83 crores last year.

Topline growth is quite impressive testament to increasing utilisation of fresh CapEx.

Will wait for their AR to understand the increase in Receivables (235 crores vs 182 crores) and capacity utilisation. Some Balance Sheet items sure need to be investigated further!

[harshitgoel]

Latest Credit Rating Report of the company. http://www.careratings.com/upload/CompanyFiles/PR/GNA%20Axles%20Limited-07-26-2018.pdf

Some key points.

• Revenue stream of GAL remains concentrated with top-5 and top-10 clients accounting for about 62% and around 79%, respectively, of the total income in FY18 (PY: 56% and 74%, respectively).
• The association with some of the domestic clients has been since the commencement of company operations.
• The company has been supplying to some of the export clients since 2000. Long and established relationships with clients provide revenue stability to the company.
• The company undertook capacity enhancement project in FY17-18 for enhancing its forging and machining capacity to ~4 million units per annum (~3 million units, as on March 31, 2017) at a total project cost of ~Rs.80 cr. The project cost was funded through the IPO (Initial Public Offer) proceeds generated by the company during FY17.
• The company is further enhancing its forging and machining capacity to 5 million units per annum at a total project cost of Rs.90 cr., proposed to be funded completely through term loans of Rs.90 cr (full tied-up). As on June 30, 2018, the company has incurred a total expenditure of ~Rs. 35 crore towards building & advances for purchase of machineries. The project is expected to start commercial operations by April-19.

[pranav25]

According to this, they are operating at 85% capacity. The capacity increase of 1 million units will be phased, with half of it being done in this year and the other half, next year. They are expecting 25% revenue growth YoY for 18-19.

I’ve recently started analyzing the company. If I may ask, what are your views about the valuations after the correction in the stock price? Also does anyone have any update on when production of LCV and SUV axles might start?

[AKGupta]

Q1’18 results as below:

Revenue at 212 crore vs 153 crore prior year same qtr.

PAT at 14 crore vs 11 crore prior yr same qtr.

New capex announced to 5m production capacity by April’19 funded by debt. Here’s the interview of one of the directors: https://www.youtube.com/watch?v=NyouKW7280M

Given that the overall CV cycle is in uptrend, doesn’t look so bad to me.

I wish the company would improve on the corporate governance side, holding conference calls with investors etc.

[AKGupta]

Capex of 1m was supposed to come in Sept’18 if I recall correctly. Additional 1m will be by next March/ April for which they’re taking more loans (~100 crores).

My concern is more related to their receivables position. Combined with the additional debt burden, it could create a cash flow problem. Maybe that’s why the market is discounting it? Don’t know for sure.

But yes current levels definitely look comfortable. If only I knew why…