After around 12 percent rise in the last 1 year as well as in 2023 so far, brokerage house Axis Securities has picked Automotive Axles as its top pick of the week. This is on the back of the longish commercial vehicle (CV) cycle, healthy industry outlook, stable margin profile and strong EBITDA growth.
The brokerage has a ‘buy’ recommendation on the stock with a target price of ₹2,400, indicating an upside of 9 percent from its current market price of ₹2,199.20, as of September 25.
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 and defense 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. The company caters to the market for CVs of 7.5T and above.
Stock Price Trend
The stock has jumped around 12 percent in the last 1 year and in 2023 YTD. It has given positive returns in 5 of the 9 months in the current calendar year, gaining the most in January, almost 29 percent and shedding the most in February, down over 12 percent.
Currently trading at ₹2,199, the stock is over 18 percent away from its record high of ₹2,690, hit on May 15, 2023. Meanwhile, it has advanced over 20 percent from its 52-week low of ₹1,825, hit on September 28, 2022.
Earnings
In the June quarter, the company posted an over 24 percent YoY jump in its net profit to ₹37.8 crore as against ₹30.4 crore in the year-ago period. Meanwhile, its total income grew just 6.5 percent YoY to ₹534.15 crore in the quarter under review as compared to ₹501.28 crore in the corresponding period last year.
Investment Rationale
Longish CV Cycle: The brokerage believes that Automotive Axles remains well-positioned to benefit from a longish CV upcycle. Post the strong growth of the CV segment in FY23, the growth rate could moderate but still sustain at a good level as its recent channel check suggests that the CV industry will continue to grow led by governments' focus on infrastructure activities, said Axis.
CV Industry Outlook: Axis further informed that Ashok Leyland expects industry growth at 8-10 percent YoY for MHCV (medium and heavy commercial vehicle) and 5-6 percent YoY growth for LCV (light commercial vehicle) in FY24E (over the high base of FY23). Automotive Axles management also expects similar growth momentum in FY25, led by a favorable macroeconomic environment, strong replacement demand and robust Government Capex outlay, said the brokerage.
Growth Drivers: According to Axis, increased government spending on public transport, Voluntary Vehicle Scrappage policy and increased Infrastructure spends by the government are positive triggers for the industry. The company pursues to outpace the industry growth by increasing market penetration through new products, growth in exports, and increasing tonnage per axle, it added.
EBITDA Growth: Though the company’s revenue has grown by 7 percent YoY in Q1FY24, EBITDA has increased by 16 percent YoY, led by the improvement in the gross margins (up 47bps/147bps YoY/QoQ), said Axis. The company’s margins are expected to remain stable in future quarters, led by a) Stable Commodity prices (Steel), b) Increasing content and tonnage per axle and c) Cost control and value engineering, it explained.
Valuation
The stock trades at 16.4x FY25 EPS, which appears undemanding. Axis values the stock at 17.5x Sep ’25 EPS (From 17x earlier and rollover from Jun’25) to arrive at its target price of ₹2,400/share (from ₹2,300/sh).
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.
