IPO Note | Auto ancillary
September 9, 2016
GNA Axles Limited
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Issue Open: September 14, 2016
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Issue Close: September 16, 2016
GNA Axles Ltd (GNAAL) is a Punjab based manufacturer of rear axle shafts, other
Face Value: `10
shafts and spindles used in on-highway vehicular (including LCVs, MCVs, HCVs,
Present Eq. Paid up Capital: `15.2cr
bus etc) and off-highway vehicular (agricultural tractors and machinery, forestry,
construction equipment, mining etc) segments. In FY2016, the company’s revenue
Fresh Issue: 0.63cr Shares
mix was constituted by domestic and export segments in the proportion of ~45%
Offer for sale:-NA
and ~55% respectively. GNAAL’s customers include OEMs such as Mahindra &
Post Eq. Paid up Capital: `21.5cr
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
Market Lot: 70 Shares
two manufacturing facilities, both of which are located in Punjab. It exports
Issue (amount): `129*-130cr**
products to various countries across America, Europe and Asia Pacific.
Price Band: `205-207
Strong recovery in tractor segment to drive growth: 70% of the company’s
Post-issue implied mkt. cap `440cr*- 444cr**
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
Note:*at Lower price band and **Upper price band
due to poor monsoons which has resultantly impacted GNAAL’s domestic revenue
growth. However, during 5MFY2017, we saw a strong (~19% yoy) recovery at
Book Building
major tractor players, thanks to the optimal monsoon this year. Going forward we
QIBs
50%
expect the company’s domestic revenue to improve on the back of strong recovery
in the tractor segment.
Non-Institutional
15%
Strong global footprint: GNAAL’s export revenue is constituted by America
Retail
35%
(~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
Post Issue Shareholding Pattern(%)
Manufacturing of America, Dana Ltd and Kubota Corporation. The company
Promoters Group
70.7
reported a strong ~33% export revenue CAGR over FY2013-16; we expect
MF/Banks/Indian
continuation of healthy growth over the next 2-3 years on the back of low cost
FIs/FIIs/Public & Others
29.3
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
Amarjeet S Maurya
segment; plus, given the relatively attractive valuation proposition, we
+91 22 4000 3600 Ext: 6831
recommend a SUBSCRIBE on the issue.
[email protected]
Please refer to important disclosures at the end of this report
1
GNA Axles | IPO Note
Exhibit 1: Key Financial
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016
Net Sales
399
349
404
430
509
% chg
-
(12.5)
15.8
6.5
18.2
Net Profit
17
5
13
22
26
% chg
-
(71.6)
175.6
62.8
20.2
OPM (%)
13.0
12.6
12.6
14.0
16.2
EPS (`)
11.2
3.2
8.7
14.2
17.1
P/E (x)
18.5
65.2
23.7
14.5
12.1
P/BV (x)
4.3
4.0
3.4
2.8
2.3
RoE (%)
23.0
6.1
14.5
19.1
18.8
RoCE (%)
26.9
16.9
16.4
15.4
22.4
EV/Sales (x)
1.0
1.2
1.1
1.0
0.8
EV/EBITDA (x)
7.5
9.4
8.4
7.3
5.1
Source: Company, Angel Research; Note: Valuation ratios based on pre-issue outstanding shares and at upper end of the price band
Company background
GNAAL is a Punjab based manufacturer of rear axle shafts, other shafts and
spindles used in on-highway and off-highway vehicular segments. The company
manufactures a range of rear axle shafts, other shafts, and spindles for the on-
highway segment vehicles, including light commercial vehicles, medium
commercial vehicles, and heavy commercial vehicles, as well as other transport
vehicles, such as buses. It also offers a range of rear axle shafts and other shafts
for the off-highway segment, which include agricultural tractors and machinery,
forestry and construction equipment, electric carts, and other specialty vehicles
used in mining and defense sectors.
In FY2016, the company’s revenue mix was constituted by domestic and export
segments in the proportion of ~45% and ~55% respectively. Its customers include
OEM's 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 exports its products to various countries including the United States,
Sweden, Turkey, Brazil, Italy, Germany, Spain, Mexico, Japan, the United
Kingdom, France, China, and Australia. It has two manufacturing facilities: Unit I
located in village Mehtiana, district Hoshiarpur, Punjab and Unit II located at
village Gulabgarh Jattan, district Kapurthala, Punjab. Both of its manufacturing
facilities are ISO/TS 16949:2009 certified for manufacture of rear axle shafts,
other shafts and spindles for automotive applications.
September 9, 2016
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GNA Axles | IPO Note
Exhibit 2: Product portfolio
Source: Company, Angel Research
Issue details
The company is raising `129-130cr through fresh issue (0.63cr share) of equity
shares in the price band of `205-207. The fresh issue will constitute ~29% of the
post-issue paid-up equity share capital of the company assuming the issue is
subscribed at the upper end of the price band.
Exhibit 3: Shareholding pattern
Particulars
Pre-Issue
Post-Issue
No. of shares
(%)
No. of shares
(%)
Promoter group
15,165,400
100.0%
15,165,400
70.7%
Others
-
-
6300000
29.3%
Total
15,165,400
100.0%
21,465,400
100.0%
Source: Company, Angel Research
Objects of the offer
~`80cr will be used for purchase of plant & machinery.
~`35cr will be used for funding working capital requirements.
The balance will be used for general corporate purposes.
September 9, 2016
3
GNA Axles | IPO Note
Investment rationale
Company to benefit from expected CV segment growth
Going forward, we expect strong growth in commercial vehicle sales on back of
improvement in industrial activity and the government's focus on speeding up
execution of infrastructure projects in the country. Further, implementation of the
GST is expected to expedite the evolution of the hub-and-spoke model for
transportation, which will create increased demand for LCVs and HCVs, thus
benefitting the company.
Exhibit 4: Flat growth in domestic revenue over FY2013-16
12.6
270
15
260
10
250
1.2
5
240
0
230
(5)
(9.2)
220
(13.8)
(10)
210
(15)
232
261
225
228
200
(20)
FY2013
FY2014
FY2015
FY2016
Domestic
yoy growth (%)
Source: Company, Angel Research
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.
September 9, 2016
4
GNA Axles | IPO Note
Exhibit 5: Domestic tractor sales trend
FY2012
FY2013
FY2014
FY2015
FY2016
5MFY2017*
25
19.9
19.0
20
15
11.4
10
5
0
(5)
(1.7)
(10)
(10.5)
(15)
(13.0)
Source: Company, Angel Research Note: * Sales volume of M&M & Escorts which cover more than
50% market share.
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.
Exhibit 6: Export % to total revenue
Exhibit 7: Historical export growth
600
54.1
60
300
47.8
500
50
250
275
509
35.5
400
33.6
40
200
431
206
300
349
404
30
150
200
20
143
100
117
100
10
50
0
0
FY2013
FY2014
FY2015
FY2016
0
FY2013
FY2014
FY2015
FY2016
Total revenue
% to total revenue
Source: Company, Angel Research
Source: Company, Angel Research
Consistent operating margin improvement
GNAAL has been consistently reporting margin improvement over the last five
years on back of its effective cost management strategy. It has been following
measures such as adopting value engineering at die making to reduce the cost of
input material, optimising tool consumption by using designated tools for
designated processes, and shifting from furnace oil/diesel to electricity to minimise
the burning losses in forging. Further, certain of its forging facilities have been
robotised to increase capacity utilisation. Moreover, the company derives ~55%
September 9, 2016
5
GNA Axles | IPO Note
revenue from exports which entail higher margins compared to 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 operating performance.
Exhibit 8: Historical operating margin trend
17
16.2
16
15
14.0
14
13.0
13
12.6
12.6
12
11
FY2012
FY2013
FY2014
FY2015
FY2016
Source: Company, Angel Research
September 9, 2016
6
GNA Axles | IPO Note
Outlook and 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.
Exhibit 9: Comparative Valuation
P/E
P/BV
ROE EV/Sales
EV/EBITDA
Pre issue valuation^
(x)
(x)
(%)
(x)
(x)
GNAAL
FY2016
12.1
2.3
18.8
0.8
5.1
Talbros Engineering
FY2016
19.5
1.8
9.4
0.6
8.9
Source: RHP, Bloomberg; Note: ^based on price at upper band & pre-market cap
Risks
Intense competition and lack of pricing power: Fewer entry barriers and high
competition have resulted in a low pricing power in the industry.
Currency fluctuation:
55% of the company’s revenues come from exports;
cross-currency headwinds could impact the company’s earnings going forward.
Client concentration risk: The top five and the top ten clients of the company
account for ~50% and ~80% of the revenues, respectively, thus exposing the
company to the risk of client concentration.
September 9, 2016
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GNA Axles | IPO Note
Profit & Loss Statement
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016
Total operating income
399
349
404
430
509
% chg
(12.5)
15.8
6.5
18.2
Total Expenditure
347
305
353
370
426
Raw Material Consumed
269
234
274
279
318
Personnel Expenses
14
16
19
21
24
Others Expenses
64
55
60
70
85
EBITDA
52
44
51
60
82
% chg
(15.3)
15.8
19.0
36.3
(% of Net Sales)
13.0
12.6
12.6
14.0
16.2
Depreciation& Amortisation
12
14
17
23
27
EBIT
39
30
33
37
55
% chg
(23.2)
10.6
12.0
47.4
(% of Net Sales)
9.9
8.7
8.3
8.7
10.9
Interest & other Charges
12
13
15
17
16
Other Income
0
0
0
1
0
(% of PBT)
0.1
0.7
1.3
2.7
1.1
Recurring PBT
28
18
18
21
39
% chg
(36.7)
4.7
12.3
89.5
Extraordinary Expense/(Inc.)
-
-
-
-
-
PBT (reported)
28
18
18
21
39
Tax
11
13
5
(1)
13
(% of PBT)
39.2
72.7
28.2
(4.1)
34.0
Reported PAT
17
5
13
22
26
% chg
-
(71.6)
175.6
62.8
20.2
(% of Net Sales)
4.2
1.4
3.3
5.0
5.1
Basic EPS (`)
11.2
3.2
8.7
14.2
17.1
Fully Diluted EPS (`)
11.2
3.2
8.7
14.2
17.1
% chg
-
(71.6)
175.6
62.8
20.2
September 9, 2016
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GNA Axles | IPO Note
Balance Sheet
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016
SOURCES OF FUNDS
Equity Share Capital
15
15
15
15
15
Reserves& Surplus
59
63
76
98
123
Shareholders Funds
74
79
92
113
138
Total Loans
73
100
113
130
108
Other long term liabilities
-
-
16
-
-
Deferred Tax Liability
3
11
13
6
4
Total Liabilities
150
190
233
249
250
APPLICATION OF FUNDS
Gross Block
161
194
248
285
301
Less: Acc. Depreciation
66
58
79
126
153
Net Block
95
137
169
160
147
Investments
-
-
-
-
0
Current Assets
172
181
213
267
299
Inventories
53
53
61
92
91
Sundry Debtors
85
87
111
122
162
Cash
1
1
1
0
1
Loans & Advances
13
15
15
23
18
Other Assets
21
25
25
30
27
Current liabilities
118
128
149
178
196
Net Current Assets
54
54
64
89
103
Mis. Exp. not written off
-
-
-
-
-
Total Assets
150
190
233
249
250
September 9, 2016
9
GNA Axles | IPO Note
Cash Flow Statement
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016
Profit before tax
28
18
18
21
39
Depreciation
12
14
17
23
27
Change in Working Capital
(14)
2
(10)
(26)
(10)
Interest / Dividend (Net)
11
12
15
15
15
Direct taxes paid
(9)
(5)
(4)
(6)
(16)
Others
(0)
(0)
(0)
(0)
(0)
Cash Flow from Operations
28
40
36
27
55
(Inc.)/ Dec. in Fixed Assets
(23)
(54)
(61)
(14)
(16)
(Inc.)/ Dec. in Investments
-
-
-
-
-
Cash Flow from Investing
(23)
(54)
(61)
(14)
(16)
Issue of Equity
Inc./(Dec.) in loans
5
27
39
3
(24)
Dividend Paid (Incl. Tax)
-
-
-
-
-
Interest / Dividend (Net)
(10)
(12)
(15)
(16)
(15)
Cash Flow from Financing
(5)
15
24
(13)
(39)
Inc./(Dec.) in Cash
(1)
1
(1)
(0)
0
Opening Cash balances
1
1
1
1
0
Closing Cash balances
1
1
1
0
1
September 9, 2016
10
GNA Axles | IPO Note
Key Ratio
Y/E March
FY2012
FY2013
FY2014
FY2015
FY2016
Valuation Ratio (x)
P/E (on FDEPS)
18.5
65.2
23.7
14.5
12.1
P/CEPS
10.7
17.0
10.2
7.0
5.9
P/BV
4.3
4.0
3.4
2.8
2.3
Dividend yield (%)
0.0
0.0
0.0
0.0
0.0
EV/Sales
1.0
1.2
1.1
1.0
0.8
EV/EBITDA
7.5
9.4
8.4
7.3
5.1
EV / Total Assets
1.4
1.3
1.1
1.0
0.9
Per Share Data (`)
EPS (Basic)
11.2
3.2
8.7
14.2
17.1
EPS (fully diluted)
11.2
3.2
8.7
14.2
17.1
Cash EPS
19.3
12.2
20.2
29.4
35.0
Book Value
48.6
51.8
60.4
74.4
91.2
Returns (%)
ROCE
26.9
16.9
16.4
15.4
22.4
Angel ROIC (Pre-tax)
27.0
17.0
16.4
15.5
22.5
ROE
23.0
6.1
14.5
19.1
18.8
Turnover ratios (x)
Asset Turnover (Gross Block)
2.5
1.8
1.6
1.5
1.7
Inventory / Sales (days)
49
55
55
78
66
Receivables (days)
78
91
101
103
116
Payables (days)
86
113
111
125
117
WCC (ex-cash) (days)
40
33
45
56
65
September 9, 2016
11
GNA Axles | IPO Note
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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12