ICICIDirect - Initiating coverage - Automotive Axles (Price: Rs 590, Target: Rs 716, BUY)
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Sunil
Mar 4, 2007, 11:37:51 PM3/4/07
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Automotive Axles (AUTAXL)
Price: Rs 590 Target: Rs 716 OUTPERFORMER
Automotive Axles Ltd (AAL) is a major producer of drive axle assemblies for
commercial vehicles. It caters to automobile majors such as Tata Motors and
Ashok Leyland. With favourable trends in automobile offtake and new
capacity, the momentum in earnings growth is likely to be sustained. We
initiate coverage on the company with an Outperformer rating and 12-month
target price of Rs 716.
Buoyant demand to drive revenue growth: AAL is a major supplier to OEMs like
Ashok Leyland and Tata Motors in India, and Arvin Meritor (its joint venture
partner). Both Ashok Leyland and Tata Motors plan to increase production
capacities. The company also supplies to other domestic CV majors.
Increasing volumes from customers will boost demand for axles, supporting
AAL's revenue growth. We project net sales to grow at a CAGR of 26.1% and
net profit at 25.7% over FY06-09E.
Exports - the next growth driver: Though exports account for only 8% of the
total turnover, their contribution is likely to increase to about 20% going
forward. AAL's exports are mainly to Arvin Meritor through Meritor HVS
(India). Arvin Meritor is the largest component supplier in the US.
Increasing cost pressures for Arvin Meritor is likely to open up more
outsourcing opportunities for AAL. Higher margins of around 32-35% on
exports against 18-19% on domestic sales would further help it protect its
margins at around 18% going forward.
Expansion to support intensifying demand: The company is scaling-up capacity
and also setting up a gear sets facility. It is increasing its axle capacity
by about 35% during FY06-08E, while its gear sets capacity would be 170,000
units. The company has been successful in passing on rising input costs to
its customers and to a great extent is free from realization pressures.
Volume growth along with better realizations would continue to expand the
top line going forward.
Valuations: At the current price of Rs 590, the stock is trading at 17x
FY07E EPS of Rs 37.5 and 14.3x FY08E EPS of Rs 44.7. We believe the stock
deserves a higher P/E due to the company's higher return ratios, assured
volume growth and strong demand outlook. We rate the stock an OUTPERFORMER
and value it at Rs 716, 16x the FY08E EPS.
Details in report attached.
--
http://DEADPRESIDENT.BLOGSPOT.COM
Price: Rs 590 Target: Rs 716 OUTPERFORMER
Automotive Axles Ltd (AAL) is a major producer of drive axle assemblies for
commercial vehicles. It caters to automobile majors such as Tata Motors and
Ashok Leyland. With favourable trends in automobile offtake and new
capacity, the momentum in earnings growth is likely to be sustained. We
initiate coverage on the company with an Outperformer rating and 12-month
target price of Rs 716.
Buoyant demand to drive revenue growth: AAL is a major supplier to OEMs like
Ashok Leyland and Tata Motors in India, and Arvin Meritor (its joint venture
partner). Both Ashok Leyland and Tata Motors plan to increase production
capacities. The company also supplies to other domestic CV majors.
Increasing volumes from customers will boost demand for axles, supporting
AAL's revenue growth. We project net sales to grow at a CAGR of 26.1% and
net profit at 25.7% over FY06-09E.
Exports - the next growth driver: Though exports account for only 8% of the
total turnover, their contribution is likely to increase to about 20% going
forward. AAL's exports are mainly to Arvin Meritor through Meritor HVS
(India). Arvin Meritor is the largest component supplier in the US.
Increasing cost pressures for Arvin Meritor is likely to open up more
outsourcing opportunities for AAL. Higher margins of around 32-35% on
exports against 18-19% on domestic sales would further help it protect its
margins at around 18% going forward.
Expansion to support intensifying demand: The company is scaling-up capacity
and also setting up a gear sets facility. It is increasing its axle capacity
by about 35% during FY06-08E, while its gear sets capacity would be 170,000
units. The company has been successful in passing on rising input costs to
its customers and to a great extent is free from realization pressures.
Volume growth along with better realizations would continue to expand the
top line going forward.
Valuations: At the current price of Rs 590, the stock is trading at 17x
FY07E EPS of Rs 37.5 and 14.3x FY08E EPS of Rs 44.7. We believe the stock
deserves a higher P/E due to the company's higher return ratios, assured
volume growth and strong demand outlook. We rate the stock an OUTPERFORMER
and value it at Rs 716, 16x the FY08E EPS.
Details in report attached.
--
http://DEADPRESIDENT.BLOGSPOT.COM
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