Automotive Axles: Geared for the run

Even as volume growth in some segments of the auto industry is still stuck in second gear, sales of medium and heavy commercial vehicles (MHCVs) have decisively revived.

This upturn has given a fresh lease of life to many mid- and small-cap auto component suppliers focused on this segment in the last few quarters. With more steam left in the MHCV segment and sale of light commercial vehicles (LCVs) too picking up in recent months, component makers serving commercial vehicle manufacturers are on a purple patch right now.

Automotive Axles is one such company. It manufactures drive and non-drive axles, front steer axles, and defence axles, among others, for the CV industry. The company counts Tata Motors, Ashok Leyland, AMW, Daimler, Volvo, Volvo-Eicher, Escorts and Tata Hitachi among its clients.

With the stock market recognising the opportunity in the CV space, many stocks have moved up sharply in the last one-two years and are now trading at rich valuations.

But Automotive Axles is among the more reasonably valued ones. While the stock did gain in the 2014 rally, market volatility has seen it lose 15-20 per cent in the last year.

Besides, with improving earnings growth, the company’s trailing 12-month price-to-earnings ratio has come down from 54 times a year ago to 26 times now. This is cheaper than other CV suppliers, such as ZF Steering Gear (28 times), Sundaram Clayton (29 times) or Wabco India (62 times). Investors can however, take limited exposure, considering the small cap nature of the stock; its market capitalisation is only around ₹920 crore.

MHCV sales have picked up well in the last two fiscals. From a 25 per cent fall in 2013-14 compared with the previous year, MHCV sales grew 16 per cent in 2014-15 and further by a stronger 30 per cent in 2015-16.

The reform measures taken in sectors such as mining, big investments being made by the government in road infrastructure and the fact that borrowing rates are getting cheaper bode well for CV sales in the months to come.

Besides, higher industrial growth as the economy gains speed and higher agricultural output from the good monsoon are expected to keep demand for freight transport strong and, hence, the demand for CVs healthy. With LCV sales reversing its downtrend too, truck sales should fire on all cylinders.

Automotive Axles will gain from these macro-economic tailwinds. Apart from manufacturing axles, the company also produces axle housings and assemblies and drum and air disc brake assemblies. It supplies axle housing to big CV players, such as Tata Motors and Ashok Leyland. Axle assemblies, being a step up in the value chain, bring higher realisations. The company is now the largest maker of rear drive axle assemblies in the country.

It has diversified into the manufacture of components for air actuated S-CAM brakes too. To further increase its value proposition, the company has expanded its product portfolio in recent years to include off-highway axles. With the auto component industry being highly fragmented, an increase in the number of components supplied to an automaker would help enhance a supplier's bargaining power.

In line with the upturn in CV sales, Automotive Axles’ sales and profit growth have improved steadily in the last four quarters. For the quarter ended March 2016, sales grew 23 per cent to ₹312 crore over the same period of the previous year. Net profit more than doubled to about ₹11 crore, from ₹5 crore for the quarter ended March 2015. Operating margin was 9.1 per cent compared with 7.5 per cent in the March 2015 quarter.

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