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):
- Capacity expansion – 80 crores fixed investment in Unit 2. Unit 1 has 80% capacity utilization in 2017 for real axle shafts and spindles)
- Improving MHCV demand in key export markets mainly US (A Shortage of Trucks Is Forcing Companies to Cut Shipments or Pay Up - WSJ)
- Entry into new segments: LCV, SUV axles
- 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
- Paring of debt with IPO proceeds – Company plans to be net debt free in the next 2 years)
- Low competitive intensity (only one other major player Talbros Engg.)
- Improvement in rural demand (tractors) with rural initiatives like farm loan waiver, doubling of farmer income
- Safe from Electric Vehicles disruption
- High promoter holding (~65%) & management looks stable and honest
- MF holding (14%)-HDFC, Reliance, UTI etc
- High domestic market share- ~60-65% in rear axle market for MHCV and tractors
- Debt unsustainability – They have consolidated ~100 crore debt, mostly short term, in books as of FY17 (albeit this is reducing)
- Appreciating INR
- Appreciating steel price (though limited downside as this is passed on to customers with a time lag)
- 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)
- Bad monsoons impacting tractor demand
- 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: