Viewpoint

GNA Axles
To continue outpacing industry

GNA Axles (GNA) posted in line operating performance for Q2FY20.

Sector: Automobiles
Topline grew 13% y-o-y despite a challenging industry environment.
Result Update Increasing share of business and entry into new segments enabled
double-digit growth. Higher depreciation expenses (depreciation grew
Change 32% y-o-y due to commencement of SUV plant) led to Net Profit coming
lower than estimates. GNA is expected to continue outpacing industry
View: Positive  as customers increase procuring from GNA for newer locations given
CMP: Rs. 269 the established product quality and benefits of low cost manufacturing.
Moreover, its recent foray into the SUV business enhances the product
Upside potential: 20-22%  offering and provides additional growth avenue. We expect GNA to
pose mid-single digit revenue growth (6% CAGR over FY2019-FY2021
á Upgrade  No change â Downgrade period) as against expectations of an industry drop. Luring valuations of
7.8x FY21 earnings and 1.1x FY21book value provide additional comfort
factor. P/E multiple of 7.8x is significantly lower than long term average
Company details multiple of 10.7x.We retain a positive view on the stock with an upside
potential of 20-22%.
Market cap: Rs. 577 cr
Key positives
52-week high/low: Rs. 407/211 ŠŠ GNA Axles maintained double-digit growth rate in Q2FY20 (13% y-o-y
growth) despite challenging market conditions. Increased share of
NSE volume: (No of
0.44 lakh business from customers led to outperformance.
shares) ŠŠ Tax rate in Q2FY20 stood at 13% due to the adoption of a new corporate
tax regime and write back of excess tax for earlier period.
BSE code: 540124
Key negatives
NSE code: GNA
ŠŠ Depreciation expenses rose sharply 32% y-o-y and were higher than
estimates driven by commencement of the new SUV plant.
Sharekhan code: GNA
ŠŠ A weak demand environment in the domestic tractor segment restricted
Free float: (No of the overall topline growth.
73 cr
shares) Our Call
Earnings growth in challenging environment; luring valuations; retain
Shareholding (%) positive view: GNA is poised to continue outpacing industry growth driven
by an increased share of business from customers. We expect GNA to pose
Promoters 66.5% mid single-digit growth (6% over FY2019-2021 period) as against a drop
Institutions 13.3% expected for the industry. Earnings growth in a challenging environment is
commendable. We find the current P/E valuations of 7.8x FY2021 earnings
Corporate Bodies 1.5% and P/B of 1.1x FY2021 book value luring. P/E valuations are significantly
lower than the long term average historical multiple of 10.7x. We retain
Foreign 1.4% positive view on the stock with an upside potential of 20-22%.
Public and Others 17.3%
Key Risks
Overall industry growth is under pressure in both the domestic as well as
Price chart export markets. Further demand weakness can impact the overall growth
450
prospects for the company.
400

350

300
Valuation Rs cr
250
Particulars FY2017 FY2018 FY2019 FY2020E FY2021E
200
Revenues (Rs cr) 513.4 670.1 928.3 1021.1 1041.5
150 Growth (%) 1.0 30.5 38.5 10.0 2.0
Nov-18

Jan-19

Nov-19
May-19

Sep-19
Jul-19
Mar-19

EBIDTA (Rs cr) 80.4 103.0 145.1 162.4 163.5

OPM (%) 15.7 15.4 15.6 15.9 15.7
Price performance Net Profit (Rs cr) 29.6 50.9 65.8 76.6 74.1
Growth (%) 14.0 71.8 29.5 16.3 -3.3
(%) 1m 3m 6m 12m EPS 13.8 23.7 30.7 35.7 34.5
P/E (x) 19.5 11.4 8.8 7.5 7.8
Absolute x x x x
P/BV (x) 1.9 1.7 1.4 1.2 1.1
Relative to EV/EBIDTA (x) 7.5 6.6 5.0 4.8 4.6
x x x x
Sensex ROE (%) 10.0 14.9 16.4 16.3 13.9
ROCE (%) 14.9 17.4 19.9 17.3 15.4
Sharekhan Research, Bloomberg
Source: Company; Sharekhan estimates

November 20, 2019 7

 Viewpoint
In line results operationally; higher depreciation leads to PAT miss: GNA Axles (GNA) Q2FY20 results were
in line with estimates on the operating front. Revenues at Rs 256 cr grew 13% y-o-y and were in line with
estimates of Rs 250 cr. Increased share of business enabled GNA to post double-digit topline growth in spite
of a challenging industry environment. Operating margins at 15.8% were flat on a y-o-y basis and in line with
our estimates. The depreciation for the quarter was higher by 32% y-o-y due to commencement of the new
plant for SUV. Due to the adoption of the new corporate tax regime and write back of tax for earlier periods,
the tax rate for Q2FY20 was lower at 13% y-o-y as against 36% reported in Q2FY2019. Consequently, the
adjusted PAT stood at Rs 22 cr up by 37% y-o-y but missed our estimates of Rs 27 cr.

To continue outgrowing industry: GNA reported strong 34% revenue CAGR over FY2017-2019, strongly
outpacing the industry growth. GNA has been increasing share of business from its existing clients. Given the
established product reliability and benefits of low cost manufacturing, existing customers are increasingly
sourcing from GNA. Customers have started procuring their requirements of newer locations (Australia, Brazil
and other Asian regions) from GNA thereby increasing the share of business. We expect GNA to continue
outgrowing the industry and expect 6% topline CAGR over FY2019-2021 as against mid-single digit drop
expected for the industry.

Foray in the SUV business provides additional growth avenue: GNA has forayed in to the SUV business and
has commenced operation in Q1FY2020. In the initial phases the company plans to supply parts to its existing
clients and gradually plans to ramp up the business as it looks to increase supplies and tap new customers.
The management is eyeing revenues of around Rs 40-50 crore in FY20 from the SUV business. SUV segment
would broaden the product portfolio and provide additional growth avenue.

Results Rs cr
Particulars Q2FY20 Q2FY19 %YoY Q1FY20 %QoQ
Revenues 256.0 227.2 12.6 258.2 -0.9
EBIDTA 40.4 35.9 12.7 41.3 -2.2
EBIDTA Margins (%) 15.8 15.8 - 16.0 (20) bps
Depreciation 11.4 8.6 31.8 9.8 16.4
Interest 3.6 1.8 103.9 3.6 2.6
Other Income 0.3 0.0 NA 0.0 NA
PBT 25.7 25.5 0.9 28.0 -8.2
Tax 3.4 9.2 -62.9 9.8 -65.1
Adjusted PAT 22.3 16.2 37.2 18.2 22.5
EPS 10.4 7.6 37.2 8.5 22.5
Source: Company

November 20, 2019 8

 Viewpoint
Outlook
To report growth in a challenging environment; luring valuations: The industry outlook has turned challenging
given the muted outlook for domestic tractor industry and a downturn in commercial vehicles industry in key
export markets of North America and Europe. However GNA is expected to post mid-single digit growth over
the next two years. Increasing share of business coupled with foray into the SUV business would enable GNA
to pose growth in a difficult industry environment. Also, we find the current P/E valuations of 7.8x FY2021
earnings and P/B of 1.1x FY2021 book value luring. P/E valuations are significantly lower than the long term
average historical multiple of 10.7x. We do not foresee much risks to valuations hereon.
Valuation
Fine tuned estimates; retain positive view: GNA Q2FY2020 results were in line with estimates on the
operating front. We have broadly retained our earnings estimates for FY2021. Given the valuation comfort
and earnings growth potential, we retain positive view on the stock with an upside potential of 20-22%.

One year forward P/E (x) band

20

16

12

4
Jan-17

Jan-18

Jan-19
Jul-17

Jul-18

Jul-19
Sep-16

Sep-17

Sep-18

Sep-19
Nov-16

Nov-17

Nov-18

Nov-19
May-17

May-18

May-19
Mar-17

Mar-18

Mar-19

Forward P/E Average P/E Peak P/E (x) Trough P/E

Source: Sharekhan Research

November 20, 2019 9

 Viewpoint
About company
GNA Axles Limited (GNA) is one of the leading manufacturers of axles, shafts and spindles. GNA operates
two manufacturing plants in India with an installed capacity of 2.8 mn rear axles, 0.4 mn other shafts and 0.8
mn spindles. Rear Axle shafts account for ~ 82.7 % of revenues while other shafts and Spindles constitute
5.26% and 12.01% of the GNA’s FY2018 revenues. The company caters to the requirements of primarily the
Commercial Vehicles (CV) and tractor segment in the domestic as well as exports markets. CV domestic
sales constitute 10% of the total sales of the company, while CV exports constitute 40% of the sales. Similarly
Tractor domestic sales constitute 40% while tractor exports account for 10% of sales of the company.

Investment theme
GNA has emerged has a key supplier of axles, shafts and spindles to commercial vehicle and tractor segment,
in both the domestic as well as exports markets. GNA is poised to continue outgrowing the automotive
industry driven by increased share of business. Given the established product quality and benefits of low cost
manufacturing, customers are increasingly sourcing from GNA. Recent foray in the SUV business provides a
new growth avenue as well as de-risking opportunity. GNA’s margins are likely to be stable around current
levels, leading to a mid single digit earnings CAGR over the next two years.

Key Risks
ŠŠ Any slowdown in demand from OEM’s in the exports as well as domestic markets.
ŠŠ Hardening Raw material cost
ŠŠ Adverse forex currency movements

Additional Data
Key management personnel
Mr Rachhpall Singh Executive Chairman
Mr Gursaran Singh MD
Mr Ranbir Singh CEO & Whole time Director
Mr Rakesh Kumar Chief Financial Officer
Mr Gaurav Jain Secretary
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Jasvinder Singh Seehra 14.07
2 Ranbir Singh 12.88
3 Gurdeep Singh 12.55
4 Gaurav Jain 12.55
5 Maninder Singh 11.37
6 Gursaran Singh 8.1
7 HDFC Asset Management Company 5.52
8 Sundaram Alternate Investment Fund 3.33
9 Mohinder Kaur 2.48
10 Rachhpall Singh 2.34
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

November 20, 2019 10

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