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Auto Axles (AAL) registered a 174% yoy growth in Net Sales to Rs136.3cr (Rs49.7cr), and substantial jump in the Net Profit to Rs6.4cr for 1QFY2010, ahead of expectations. The company’s performance at the operating front came in below our expectation, owing to a substantial jump in Raw Material cost. Infrastructure development, favorable regulatory policies and economic growth are some of the key factors that would determine the growth of the CV segment, going forward. Thus, AAL is expected to be one of the biggest beneficiaries on an anticipated higher off take of the Medium and Heavy CV (MHCV) segment in the next couple of years. We believe that the recovery in the CV cycle will help the stock in catching up with its historical valuations. We recommend an Accumulate on the stock.
Robust Performance, operating leverage helps clock high bottom-line growth: For 1QFY2010, Automotive Axles (AAL) registered a 174% yoy growth in Net Sales to Rs136.3cr (Rs49.7cr). AAL witnessed a 467bp yoy increase in its EBITDA Margins, on account of improved Operating Leverage. Raw Material costs, however, increased by 683bp yoy, and accounted for over 72.4% of Sales (65.6% in 1QFY2009). Overall, AAL clocked a 351.4% yoy growth in Operating Profits for 1QFY2010. The Net Profit grew to Rs6.4cr.
Outlook and Valuation: AAL derives its Revenues from the medium and heavy commercial vehicle (MHCV) Segment, which is exhibiting strong signs of recovery. At the CMP of Rs422, the stock is trading at 18.5x FY2010E and 13.9x FY2011E Earnings of Rs22.8 and Rs30.3, respectively, which is lower than its historical five-year average of 16x. We believe that the recovery in the CV cycle will help the stock in catching up with its historical valuations. We recommend an Accumulate on the stock, with a target price of Rs454, at which the stock would trade at 15x FY2011E EPS and 2.9x FY2011E BV.
Sales above expectations: For 1QFY2010, Automotive Axles (AAL) registered a 174% yoy growth in Net Sales to Rs136.3cr (Rs49.7cr), which was above our expectation of Rs109.7cr. The top-line for the company has recovered, based on the uptick in CV volumes and due to the economic recovery in general. However, the company’s performance at the operating front came in below our expectation, owing largely to a substantial jump in Raw Material cost. Yet, the company reported Rs6.4cr Net Profit for 1QFY2010 as against a negligible Profit in the same quarter last year.
OPMs at 12%, up by 467bp yoy on improved operating leverage: During 1QFY2010, AAL witnessed a 467bp yoy increase in its EBITDA Margins, on account of improved Operating Leverage, primarily from a 557bp and a 593bp yoy fall in Staff Costs and Other expenditure, respectively. Raw Material costs, however, increased by 683bp yoy, and accounted for over 72.4% of Sales (65.6% in 1QFY2009). Overall, AAL clocked a 351.4% yoy growth in Operating Profits for 1QFY2010. However, on a sequential basis, the EBITDA has shown a substantial dip of about 363bp, primarily due to the spurt in raw material costs.
Net Profit at Rs6.4cr: The Net Profit grew to Rs6.4cr. Moreover, lower Interest costs also arrested a fall in the Net Profit, to a certain extent, during 1QFY2010. We believe that the company would continue to perform well sequentially, due to the recovery in the CV cycle. Infrastructure development, favourable regulatory policies and economic growth are some of the key factors that would determine the growth of the CV segment, going forward. Thus, AAL is expected to be one of the biggest beneficiaries on an anticipated higher off take of the Medium and Heavy CV (MHCV) segment over the next couple of years. Outlook and Valuation
AAL derives its Revenues from the medium and heavy commercial vehicle (MHCV) Segment. The CV industry downturn of FY2009, when industry sales declined around 33% for MHCVs, has resulted in the over-supply in the truck industry getting corrected substantially. However, over the last few months, following the recovery in the overall economic and industrial activity, MHCV volumes have also been showing a good sequential recovery. The low base of 2HFY2009 will ensure very high yoy growth numbers in 2HFY2010. Thus overall, we estimate the domestic heavy CV Segment to witness a growth of around 20% in Volumes in FY2010E and around 14% in FY2011E.
Hence, the recovery in CV demand will aid the company in registering a CAGR of around 57.1% in Net Sales and 117.7% in Net Profit over FY2009-11E. At the CMP of Rs422, the stock is trading at 18.5x FY2010E and 13.9x FY2011E Earnings of Rs22.8 and Rs30.3, respectively, which is lower than its historical five-year average of 16x. We believe that the recovery in the CV cycle will help the stock in catching up with its historical valuations.
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