Buy This Auto Ancillary Stock For Superb Returns, SUV Segment To Drive Growth

Sharekhan is betting on the stock of GNA Axles for a decent 18 returns from current levels, led by a good bounce in the farm sector and commercial vehicle sector.

Good quarterly results

GNA Axles Limited's Q1FY23 results exceeded expectations on higher sales, leading to upbeat revenue, EBITDA and PAT by 20.1%, 23.6% and 39.3% respectively. "Net revenues were up 24.9% q-o-q to Rs375 crore, led by increased domestic and export sales. The EBITDA margin expanded 30bps q-o-q to 13.5%, driven by cost reductions and positive operating leverage, despite significant inflation in raw material costs. As a result, EBITDA and PAT grew by 27.8% q-o-q and 49.2% q-o-q to Rs 50.5 crore and Rs27 crore respectively in Q1FY23," Sharekhan has said.

Management expectations

According to Sharekhan, the management has met its target to grow more than 35% in revenues during FY22, though the margins declined by 200 bps in FY22 to 14.2%. The company is currently operating at 75- 80% capacity utilisation and does not plan any major Capex in the medium term. The company will prefer to increase capacity by 10% through debottlenecking.

SUV segment to drive growth opportunity

GNA's foray into the SUV segment would act as an incremental growth driver going forward. GNA would supply SUV axle shafts to its existing CV customers (in export markets) who are already in the SUV business. Entry into the SUV segment would not only provide an additional growth avenue but will also de-risk its business model by reducing the cyclicality of the CV segment. Further, the company plans to move into the domestic SUV segment in the second phase.

Maintain positive view on the company

Sharekhan says that it maintains its positive stance on the company and expect revenues and profitability to normalise from Q2FY23 onwards, driven by improvement in US and Europe truck sales. "The company has exposure to domestic tractors and CV markets, which are expected to remain buoyant going forward. We have fine-tuned our earnings estimate to build the impact of near-term supply challenges in the global CV market," it has stated.

GNA Axles to grow at faster pace

Sharekhan expects GNA Axles to grow at a faster pace than the industry, given the company's focus on increasing business with the existing clients and the acquisition of new clients. GNA's earnings are likely to post a robust 27% CAGR from FY2022-FY2024E, driven by an 12% revenue CAGR and a 180bps improvement in EBITDA margin at 16% in FY24E.

Buy with a price target of Rs 800 on the stock

According to Sharekhan, GNA Axles is expected to witness strong traction from domestic and global original equipment manufacturers (OEMs), driven by a recovery in US's and Europe's CV market and India's tractor market. "The outlook remains positive with recovery expected from FY2023E and FY2024E, driven by the normalisation of economic activities. Operating profit margin (OPM) would expand due to operating leverage and cost-control measures. The stock is available at attractive valuations at 10x P/E and 5.7x EV/EBITDA its FY2024E estimates," the brokerage has said.