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GNA Axles Ltd (GNAAL) is a Punjab based manufacturer of rear axle shafts, other shafts and spindles used in on-highway vehicular (including LCVs, MCVs, HCVs, bus etc) and off-highway vehicular (agricultural tractors and machinery, forestry, construction equipment, mining etc) segments. In FY2016, the company’s revenue mix was constituted by domestic and export segments in the proportion of ~45% and ~55% respectively. GNAAL’s customers include OEMs such as Mahindra & Mahindra, John Deere, Tractors and Farm Equipment (TAFE) and tier 1 suppliers to OEMs such as Automotive Axles, Meritor HVS AB and Dana. The company has two manufacturing facilities, both of which are located in Punjab. It exports products to various countries across America, Europe and Asia Pacific. Strong recovery in tractor segment to drive growth: 70% of the company’s domestic revenue comes from the tractor segment where it holds an ~50% market share. In the last two years, we have seen de-growth in the tractor industry due to poor monsoons which has resultantly impacted GNAAL’s domestic revenue growth. However, during 5MFY2017, we saw a strong (~19% yoy) recovery at major tractor players, thanks to the optimal monsoon this year. Going forward we expect the company’s domestic revenue to improve on the back of strong recovery in the tractor segment. Strong global footprint: GNAAL’s export revenue is constituted by America (~49%), Europe (~33%), the Asia Pacific (~18%), and the balance is accounted by Australia. Exports constitute ~55% of the company’s total revenue. The company’s major clients include Meritor HVS AB, John Deere, Transaxle Manufacturing of America, Dana Ltd and Kubota Corporation. The company reported a strong ~33% export revenue CAGR over FY2013-16; we expect continuation of healthy growth over the next 2-3 years on the back of low cost manufacturing advantages in India, the company’s diversified product portfolio, strong growth in the US market and with the company tapping newer international geographies. Consistent operating margin improvement: GNAAL has consistently been reporting margin improvement over the last five years on back of its effective cost management strategy and higher composition of exports in the revenue mix which entail better margins vis-a-vis the domestic market. The company has reported operating margin improvement from 13.0% in FY2012 to 16.2% in FY2016. Going forward, we expect GNAAL to continue to deliver a healthy performance on the operating front. Outlook & Valuation: In terms of valuations, the pre-issue P/E works out to 12.1x its FY2016 earnings (at the upper end of the issue price band) which is lower compared to its peers (Talbros Engineering is trading at 19.5x its FY2016 earnings). Also, GNAAL has a better margin and ROE profile than its comparable peers. Considering high export revenue composition, expected recovery in domestic sales and the company’s market leadership position in the tractor segment; plus, given the relatively attractive valuation proposition, we recommend a SUBSCRIBE on the issue.Download Full Report