Monday, August 2, 2010

>AUTOMOTIVE AXLE: Topline provides a pleasant surprise…

Automotive Axles (AAL) reported impressive Q3FY10 numbers by beating our estimates with the topline galloping 197.7% YoY and 15.4% QoQ to Rs 196.2 crore on the back of an increase in share of sales from OEMs and improvement in realisation on renegotiation of prices with OEMs. AAL had a lesser than anticipated sequential margin shrinkage of 80 bps due to better cost management initiatives and inventory control even though raw material costs rose by 70 bps during the same period. EBITDA grew 11.7% QoQ and 262.3% YoY to touch Rs 27.5 crore. Net
profit zoomed to Rs 14.5 crore with 439.4% YoY and 17.9% QoQ growth. The continuance of strong commercial vehicles (CV) demand due to the resounding domestic economic performance is expected to get reflected in the coming quarter as well.

Strong economic growth fuels demand
Continuing with the traction gained from Q4FY10, economic recovery has been robust leading to an increase in sales volumes in the medium and heavy CV (M&HCV) segment for industry leaders like Tata Motors and Ashok Leyland. AAL, as one of the major suppliers to these companies, has been a major beneficiary of the higher offtake in the CV space.

Export segment a cause for concern
The exports business of the company is channelled through its JV partner Arvin Meritor to various OEMs across the globe. However, the immediate concern is the slowdown in demand arising in the European and American continents due to the sluggish pace of economic recovery reflected in the 16.2% QoQ drop in sales from exports. The company is increasingly focusing on internal demand arising from OEMs.

The bright CV sales outlook is expected to further improve AAL’s volumes and subsequent market share. The stock is currently trading at Rs 491, 11.7x SY11E EPS of Rs 42.1. We have valued the business at 13x SY11E EPS of Rs 42.1 to arrive at a valuation of Rs 547, which implies an 11.4% upside potential. Hence, we have changed our rating on the stock to BUY.

To read the full report: AUTOMOTIVE AXLE