>AUTOMOTIVE AXLES LIMITED (HDFC SECURITIES)

Automotive Axles (AAL) is well placed to benefit from the ongoing recovery in medium and heavy commercial vehicles (MHCV). AAL belongs to the Kalyani Group and has a technological edge given its strong parentage (36% holding by Meritor HVS, USA). AAL is India’s largest independent manufacturer of rear drive axle assemblies and its top clients include Ashok Leyland and Tata Motors. AAL has emerged well out of the recent downturn and with MHCV demand remaining buoyant we expect FY09-12E revenues to grow at 40% CAGR. Margin expansion coupled with lower interest costs are set to drive a strong 81% earnings CAGR. Our target price of Rs478 offers 40% upside and is based on a 5-year average trading PE multiple of 15.8x 1-year forward earnings. Initiate coverage with a BUY.

■ Domestic truck sales surging ahead
Medium and heavy commercial vehicles (MHCV) are witnessing a strong rebound led by recovery in industrial growth and improvement in availability of vehicle financing. Outlook on MHCV demand in FY11 remains positive on the back of strong economic growth and robust demand for goods movement led by industrial sector – our Economics Team pegs FY11 GDP industry growth rate at 8.5% (cf. 8.2% in FY10). While we expect FY11 growth rates to moderate to 15% (from 25% in FY10E), in absolute terms, unit sales (at 290K) will be almost at par with earlier peak cycle (296K) levels.

■ Market leader in the axle segment
Automotive Axles (AAL), a market leader in the independent rear drive axle assemblies market, is thus well placed to benefit from increased MHCV demand. AAL’s product portfolio consists mainly of higher margin axle assemblies, while it also manufactures axle housings. While AAL’s largest client remains Ashok Leyland, over the years it has raised supplies to Tata Motors (from 10% of sales in 2003 to 20% currently) and gained
new customers like Asia Motor Works. AAL continues to expand its client base and is now targeting Man Force Trucks and Eicher-Volvo as new clients.

■ Valuations remain attractive
With MHCV demand in top gear, we expect AAL’s capacity utilization to improve from 20-35% in FY09 closer to 60-75%, driving a robust 40% revenue CAGR over FY09-12E. Margin expansion, coupled with lower interest costs should drive our forecasted 81% earnings CAGR over the same period. Cash generation is set to rise, driving gearing to lower levels and given AAL’s high dividend payout (50% in FY09) we expect sharp improvement in capital efficiencies. Stock trades at 14x adj-Mar-11 earnings (16x FY10E Sept-year-end) and we base our target price of Rs478 on a 5-year average PE multiple of 15.8x on FY11 (adj) earnings. Initiate coverage with a BUY.


Safehaven: The Announcement of the I.M.F. Sale of 191.3 tonnes of Gold - What does it really mean? (Source)

When India announced its purchase of 200 tonnes, it added a statement that it may buy more of the I.M.F. gold. This implied that it was limited by the I.M.F to 200 tonnes. But the I.M.F. never said that. Rather it said it would announce the sale of any other portion of their gold to the public. It has been several months since another sale has taken place. Now with this announcement, we are given the impression that central banks have not come forward to buy and are not buyers. Talk about 'spin’! China for sure would not buy if an announcement were to be made. It would rather buy once the gold were sold in the open market, for it could buy through its chosen bullion bank or bullion banks and do so, under the radar. In fairness to the I.M.F. we have to say that they have said they are open to central banks buying direct from them still, and will announce such sales. But you must realize that any further sales through the 'open' market will be done anonymously. This levels the playing field. However, all we will now hear is the completion of such sales. If the I.M.F. decides to sell 4 tonnes a week, we will hear about it through the E.C.B. website in tonnage terms but with no further details. Will we hear of a 100 tonne sale done this way? Unlikely, but possible! The market first reacted by fearing a dumping of this amount of gold, but once it gathered itself together, realized that it could as well be bullish for the gold price. After all 191 tonnes is an amount that the gold market does not see often, so a big buyer in the wings, finding that for one price can get a good lump might well come and bid for it. Will the I.M.F. offer the amount to the market or drip feed it? No one knows. Will they say to the market there is 191.3 tonnes on offer, we don't know. They can now play the game as they choose. If they want to sell the gold quickly, it is incumbent upon them to accept a bid for the entire amount, but rarely is life so straightforward, these days. The waters are now muddied! The reality is that there is the demand for such amounts in one sale. But the real question is, "do the I.M.F. want to sell it in one go?" We now have to wait and see. The impact on the gold price, whichever way it goes is clear.

Money Game: China Announces Even Tighter Restrictions On Loan Growth (Source)
The China Banking Regulatory Commission (CBRC) issued a new post on their website Saturday explaining new regulations aimed at tightening both personal and working capital business loans. Banks must set a lending quota after "prudent calculation" of borrowers' "actual demand" and must not lend excessively, Banks are also required to improve risk control after granting loans and to be aware of factors that might influence the repaying capabilities of borrowers through inspections and monitoring. For personal lending, the CBRC asked banks to be more sophisticated in the management of the lending process, especially on the use of the loans, according to the regulation. Borrowers will not be able to obtain loans without declaration of a specific use, and they should meet bank representatives in person to avoid false claims, according to the CBRC.These new regulations actually went in effect on February 12th, despite the Saturday web site release. It seems the regulator is trying to explain themselves further, or was just slow.

To read the full report: AAL