Introduction: 


Image result for automotive axleTarget price: Rs 1653, a 20% upside potential from Current Market Price (Rs 1366)

Established in 1981, Automotive Axles Limited (AAL) is a joint venture of Kalyani Group and Meritor Inc., USA. With manufacturing facilities located at Mysore (Karnataka) and Jamshedpur (Jharkhand), the company manufactures drive axles, non-drive axles, front steer axles, specialty & defence axles and drum & disc brakes. It provides these products to the major domestic and global manufacturers of trucks & buses pertaining to segments such as light, medium & heavy commercial vehicles, military & off-highway vehicles, aftermarket and exports. As a continuous process, the company believes in introducing new products regularly to meet the emerging needs of the commercial vehicle market. (Source: http://www.autoaxle.com/)
Company has robust client base which includes OEMs like Ashok Leyland, Daimler Trucks, MAN trucks, M&M, Tata Motors, Volvo Eicher Ltd., AMW in addition to exports to countries like USA, China, France, Italy and Brazil. 





Investment Rationale: 

1. Increase in demand: The year FY18 has been a great year for the MHCV & LCV sector and ended at a growth rate of 19.4% for the trucks segment. The government spending on infrastructure activities has increased in the states/cities like UP, Delhi and Mumbai. This has increased the demand for trucks. Also, the recent floods in Kerala may require the government bodies to rebuild infrastructure in major part of the state. This may lead to truck demand going up in the state in the coming months. With elections scheduled in 2019, there will be a rush to complete many infrastructure projects that is expected to improve CV sales. 



2. Shift in market needs: Online shopping trends for 2022 accounts to 52 million us dollars. Fulfillment requires logistics reforms and supplies to be carried in loads to the distribution centers. The adoption of Multi axle vehicles to carry loads from manufacturing to distribution facilities has increased to reduce shipping cost and increase efficiency. 



3. New Innovative product line: Meritor India, the JV partner of AAL entered the suspension market by manufacturing the slipper type suspension, a type of leaf spring suspension which is a better performing suspension over the conventional Bellcrank suspension currently used in India. Consumers would derive significant savings in the long run and marketing teams will boast the new suspensions. As more and more OEMs adopt this technology in India, revenues of AAL is likely to see sharp increase. Further AAL has introduced new products that combine suspension system with axle assembly and is looking forward to introduce integrated system combining suspension, axles and brakes in the near future. All these will create a differentiated product and push sales and margins upwards over the next few years. 
4. Rising exports opportunity : AAL’s parent Meritor Inc. is an expert in designing and manufacturing rear axles for commercial vehicles on global platform. Meritor has supply agreements with OEM from North & South America, Europe and Asia across variety of loading parameters. Currently AAL sources 10% of its topline from exporting loose parts that go into making of axles and brakes at Meritor Inc (in addition to the complete axle sets), has ample scope to grow given the reach and relations of Meritor with global OEMs.
5. Capacity expansion to cater to the mid-long term CV demand: AAL's parent Merit to meet future CV demand, the company is in process of expanding its manufacturing capacities by >25-30% till FY20. The existing axle capacity sits at 14,500 units per month. Plan is in pace to move up to 20,000 per month and brake the capacity which currently stands at 85,000 units per month will expand up to 120,000 per month. The financing requirement will be to the future of 250-300 crores for this and will be done in 50:50 arrangement as in internal accrual: LT debt raised. This expansion will help them meet the rising CV demand in the coming years.

Financials:

Revenue has become 3x and Profits 8x over FY15-18. 
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Source: Stockaxis.com

Expect Revenue and PAT to grow by 22% and 33% over FY18-20E. 

Conclusion: 


Valuing at 17x FY20E, the target price comes out to be Rs 1653, a 20% upside potential from CMP (Rs 1382).


Stock Price


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