GNA Axles. Rear axle player; rare offering! IPO Review. Price band ICICI Securities Ltd Retail Equity Research. Key investment rationale

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1 IPO Review Rating matrix Rating : Unrated Issue Details Issue Details Issue Opens 14-Sep-16 Issue Closes 16-Sep-16 Fresh Issue () Price Band ( ) Bid Multiples (no of shares) 7 No. of Shares on Offer (lacs) QIB (%) 5. Non-Institutional (%) 15. Retail (%) 35. Objects of the Issue The object of the net proceeds of the fresh issue is to purchase plant & machinery ( 8 crore) and to meet its working capital requirement ( 35 crore) Shareholding Pattern Pre-Offer Post-Offer Promoters & Promoter Group Public *Assuming issue price of 27 Financial Summary FY13 FY14 FY15 FY16 Total Revenues EBITDA EBITDA Margins PAT EPS Valuation Summary (at 27; upper price band) FY13 FY14 FY15 FY16 P/E EV/EBITDA P/BV Research Analyst Nishit Zota nishit.zota@icicisecurities.com Vidrum Mehta vidrum.mehta@icicisecurities.com Rear axle player; rare offering! September 13, 216 GNA Axles (GNA) was established in The company is among the leading manufacturers of rear axles shafts used in on-highway & offhighway vehicular segments in India. Apart from rear axle shaft (accounts for 85% of revenue), it also manufactures other shafts (6% of revenue) & spindles (9% of revenue). The company has two manufacturing facilities both located in Punjab with a total annual capacity of 2.3 million (mn) rear axle shafts,.4 mn other shafts and.3 mn spindles. In terms of revenue bifurcation, as of FY16, domestic: export mix was at 45: 55, respectively. Over the years, GNA has focused more on the export market where its revenue contribution has increased from 35% in FY12 to 55% in FY16. The company exports rear axle shafts globally with North America, Europe accounting for 45%, 33% of its export revenue, respectively. GNA has a strong relationship with some global OEMs & tier-1 suppliers. It plans to raise ~ 13 crore, of which 8 crore would be used for purchasing new plant & machinery & 35 crore for its working capital requirement. Over FY12-16, revenue, EBITDA, PAT registered a CAGR of 6%, 12%, 11%, respectively. On the balance sheet front, as of FY16, its net debt to equity was at.8x with RoE & RoCE at 18.8% & 22.6%, respectively. Key investment rationale Leading axle shafts player; with long term customer relationship GNA manufactures a diverse range of rear axle shafts, other shafts & spindles for the on-highway segment, i.e. for LCVs, MCVs & HCVs & other transport vehicles like buses. It also manufactures rear axle shafts & other shafts for the off-highway segment, i.e. for agricultural tractors and machinery, forestry & construction equipments, electric carts & other specialty vehicles used in mining and defence sectors. GNA has a large variety of rear axle shafts with the capacity to manufacture axle shafts of up to 165 kg input weight. Its customers include global OEMs and tier-1 suppliers like Dana Ltd, John Deere, Kubota Corporation & Meritor HVS AB, as well as leading Indian OEMs and tier-1 suppliers like Claas India Pvt Ltd, TAFE, International Tractors, M&M, Automotive Axles (AAL), Escorts, Axles India. At present, M&M (8% of revenue), John Deere & AAL account for ~7% of revenue each. As of FY16, revenue from its top 5 & 1 clients accounted for 57% & 74% of its overall revenue, respectively. Key Risk & Concerns GNA Axles Price band Slowdown in automotive demand, especially CV segment GNA s business is heavily dependent on the domestic automotive sector, particularly the commercial vehicle market that is cyclical in nature. The sales of axle shafts & spindles are directly related to production of commercial vehicles. Further, any slowdown in CV volumes in North America & European market, where it has significant exports could also impacts its financial performance. Further, as many other OEMs manufacture rear axle shaft in-house or through captive associates or JV, going forward, if any of its key customers decide to increase their captive manufacturing of components, GNA s business may get impacted. Fairly valued; priced at 17x on FY16 diluted EPS of 12.1 At the upper price band of 27, the stock is available at 17x on FY16 post issue diluted EPS of We believe GNA has a decent business model (strong customer base & diversified revenue) and financial performance. However, we believe the company is fairly valued at the IPO price.

2 Exhibit 1: Key Financials Total Revenues EBITDA EBITDA Margins (%) PAT Diluted EPS RoE RoCE Page 2

3 About the company Exhibit 2: Product display of axle shaft for multi utility vehicles by GNA GNA Axles (GNA) is among the leading manufacturers of rear axle shafts for on-highway (LCV, MCV, HCV & other transport vehicles such as buses) and off-highway (agricultural tractors and machinery, forestry and construction equipment, electric carts and other specialty vehicles used in mining and defence sectors). Exhibit 3: Axles shafts for commercial vehicles Exhibit 4: Spindles for commercial vehicles Exhibit 5: Product display of spindles for specialty vehicles by GNA Page 3

4 An axle is a part of the transmission assembly of an automobile. The main purpose of an axle is to bear the weight of the vehicle and also maintain the position of wheels relative to each other and to the vehicle body. Axles can either be live-axles or non-driving axles. In an automobile, live axles help in transmitting the power from engine on to wheels via the drive shaft. Generally, in commercial vehicles and agricultural tractors, the rear axle acts as the live-axle while the front axle acts as the non-drive axle. The rear axle shaft is a part of the rear axle assembly and helps in transmitting the driving torque to the wheels. GNA was established in 1993 and manufacture and supplies a diverse range of rear axle shafts, other shafts and spindles. The company s promoter & management team have significant experience in the auto ancillary industry. Jasvinder Singh Seehra, Ranbir Singh & Gurdeep Singh are the promoters of the company with an average, of ~28 years experience in engineering and auto component sector. Executive Chairman, Rachhpall Singh, and Managing Director, Gursaran Singh, have been involved in the automotive component industry since 197. GNA manufactures a large variety of rear axle shafts and has the capacity to manufacture rear axle shafts of up to 165 kg input weight. GNA has an inhouse engineering department and conducts R&D activities in each of its product divisions enabling it to innovate and develop new products and processes. The company has two manufacturing plants both in Punjab (Hoshiarpur & Kapurthala district). As of FY16, GNA has a total annual manufacturing capacity of 2.3 million rear axle shafts (utilisation level at 8%),.4 million other shafts (utilisation level at 66%) and.3 million spindles (utilisation level at 56%). We believe that, on an average, the company s blended realisation for rear axle shafts was at ~ 2,3 per rear axle shaft, ~ 1,2 per other shaft and ~ 2,55 per spindle. In terms of product wise revenue bifurcation, as of FY16, rear axle shafts accounted for 85% revenue, other shafts accounted for 6% revenue while spindles accounted for the remaining 9% of revenue. Further, the domestic: export mix was at 45: 55, respectively. Its key domestic customers include M&M (accounts for 8.3% of overall revenue), Automotive Axles (7.1% of revenue) and John Deere (6.9% of revenue). Over the years, the company has focused more on the export market, where its revenue contribution has increased from 35% in FY12 to 55% in FY16. The company exports rear axle shafts across the world with North America & Europe accounting for 45% & 33% of its export revenue, respectively. Other geographies, Asia Pacific & the South American region account for 18% & 3% of export revenue, respectively. A marginal ~1% of export revenue is derived from Australia. GNA has a well diversified customer base across geographies. It has supplied over 1.84 million units of axle shafts in FY16 and over 7.89 million units in the preceding five fiscals and serviced various customers in India and across different geographies including the US, Mexico, Brazil, UK, Sweden, Germany, Spain, France, Italy, Turkey, China and Japan. It has a strong and established relationship with its customers. Certain domestic customers like M&M have been its customers since The company has also been supplying axles to some of its overseas customers for more than a decade. Its customers include global OEMs and tier-1 suppliers like Dana (US, Mexico and Brazil), John Deere (Spain and US), Kubota Corporation (Japan) & Meritor HVS AB (Sweden, Italy, Brazil, US), as well as to leading Page 4

5 Indian OEMs & Tier-1 suppliers such as Claas India, TAFE, International Tractors, Escorts, Axles India, Automotive Axles and M&M. Exhibit 6: Revenue trend over past five years Total Revenues Exhibit 7: Revenue mix (domestic & exports) Domestic Export Exhibit 8: Export revenue mix (country wise bifurcation) South America 3% Australia 1% Asia Pacific 18% North America 45% Europe 33% Page 5

6 Exhibit 9: Product wise Revenue mix () Rear Axles shafts Other shafts Spindles Exhibit 1: Product wise Installed capacity & utilisation levels (FY16) Million Axles shafts Spindles Other shafts Annual Installed Capacity (Units) Utilisation (%) Investment Rationale Leading axle shafts player with long term customer relationship GNA manufactures a diverse range of rear axle shafts, other shafts and spindles for the on-highway segment, i.e. for LCVs, MCVs & HCVs and other transport vehicles such as buses. It also manufactures rear axle shafts and other shafts for the off-highway segment, i.e. for agricultural tractors and machinery, forestry & construction equipment, electric carts & other specialty vehicles used in the mining and defence sectors. GNA has a large variety of rear axle shafts with the capacity to manufacture axle shafts of up to 165 kg input weight. Its customers include global OEMs and tier-1 suppliers like Dana Ltd, John Deere, Kubota Corporation & Meritor HVS AB, as well as leading Indian OEMs and tier-1 suppliers such as Claas India Pvt Ltd, TAFE, International Tractors, M&M, Automotive Axles (AAL) Escorts, Axles India. At present, M&M accounts for 8% of revenue while John Deere & AAL account for ~7% of revenue each. As of FY16, revenue from its top five & 1 clients account for 57% & 74% of its overall revenue, respectively. Page 6

7 Diversify product portfolio & expand customer base GNA will continue its focus on development of new products as well as expand its existing lines of products. For example, the company is currently developing products such as heavy axle shafts for off-highway segment. The company also intends to diversify its customer base. Contribution from top five overseas customers has declined from 91.3% in FY15 to 8.2% in FY16. Over the past two or three years, GNA has acquired new customers for different product segments (in FY16 it started supplying rear axle shafts for HCVs to Dana Australia; in FY15, it started supplying rear axle shafts for HCVs to Meritor HVS Australia, it started supplying rear axle shafts for LCVs to Dana Brazil, it started supplying rear axle shafts for tractors TAFE are among others. Focus on exports from India GNA believes that an export oriented strategy will continue to offer it business advantages. They intend to leverage the low cost advantages of manufacturing in India. GNA has seen an increasing trend in export sale over the past three to four years. The company has over the years focused more on export market. Its revenue share has increased gradually over the past three or four years. Export revenue contribution has increased from 35% in FY12 to 55% in FY16. The company exports rear axle shafts across the world with North America & Europe accounting for 45% & 33% of its export revenue, respectively. Other geographies, Asia Pacific and South America region account for 18% and 3% of export revenue, respectively. A marginal ~1% of export revenue is derived from Australia. Decent financial performance in the past GNA Axles has reported a decent financial performance in the past. During FY12-16, revenue, EBITDA and PAT registered a CAGR of 6%, 12%, 11%, respectively. The operating margin improved from 12.7% in FY13 to 16.5% in FY16. Similarly, PAT margins improved from 1.4% in FY13 to 5.2% in FY16. The return ratio has also improved significantly in the past, from RoE & RoCE of 6.1% & 16.9% in FY13 to 18.8% & 22.6% in FY16, respectively. GNA s debt is also at reasonable levels with debt as of FY16 at 18 crore, with net debt to equity at.8x. Also, in the past, it has generated free cash flows of ~ 7 crore in FY16, which is positive for the company. Page 7

8 Exhibit 11: Revenue trend Exhibit 12: Profitability trend Total Revenues PAT Exhibit 13: EBITDA & PAT margins (%) trend Exhibit 14: Return ratios (RoE & RoCE) trend % % EBITDA Margins (%) PAT Margins (%) RoE RoCE Exhibit 15: Net debt/equity Exhibit 16: Free cash flow Net Debt/Equity FCF Page 8

9 Key risk & concerns Slowdown in automotive sector particularly CV segment GNA s business is heavily dependent on the domestic automotive sector, particularly the commercial vehicle market. Sales of axle shaft & spindles are directly related to the production of commercial vehicle. Further, any slowdown in CV volumes in the North America & European market where it has significant exports could also impacts its financial performance. Even slower activity by its top five customers (Meritor HVS AB, Dana Ltd, Mahindra & Mahindra and John Deere, which account for 57% of revenue) could impact its performance. Concentration (product + client) risk Revenues from rear axle shaft currently account for 85% of revenue and seem to be the single product concentration risk. Any change in industry dynamics or change in technology/substitute may impact its product sale thereby impacting its overall performance. Further, GNA also has a client concentration risk, as sales to its top five clients account for 57% of its revenue while sales to its top 1 account for 74% of its revenue. Hence, its inability to diversify its concentration (product + client) risk may impact its performance, going forward. Foreign currency fluctuation risk Over the years, GNA has focused more on the export market. It has increased its share from 35% in FY12 to 55% in FY16. It supplies components to countries namely US, Sweden, Turkey, Brazil, Italy, Germany, Spain, Mexico, Japan, UK, France, China and Australia. We believe any adverse movement in the foreign currency may impact its performance. Steel prices (input cost) movement may impact its performance The primary raw material required for manufacturing GNA products is steel. Steel is procured locally from customer approved steel producers in the form of hot rolled bars & round corner squares. Its procurement of material grades of steel is done in accordance with specifications/standards provided by customers. The company has lower pricing power and may face a severe impact on its performance in case of adverse steel price movement. Common promoter group companies may give rise to conflict of interest GNA s promoters have interests in other companies viz. GNA Gears, GNA Udyog, Amarsons Automotives & Guru Nanak Transmission Punjab. The promoter group companies are authorised to carry out/engage in businesses similar to GNA Axles and serve the same customers. In one of the instances, GNA Axles and GNA Gears supply different components to a customer under the same agreement. In cases of conflict, there is no guarantee that promoters will not favour any of the promoter group companies or vice-versa. Page 9

10 Objects of issue The object of the net proceeds (~ 13 crore) of the fresh issue will be utilised for the purchase of plant & machinery, for meeting its working capital requirement and for general corporate purposes. Of the net proceeds, 8 crore would be used for the purchase of plant & machinery, which includes CNC machines, equipment for the forging shop, utility & power generator, testing equipments and others. GNA aims to purchase new machinery to expand its capacity & optimally utilise its existing capacity, which will help the company to meet the increase in demand over the next few years. Further, 35 crore would be used as its working capital requirement, which is for its smooth day-to-day operations. Valuations At the upper price band of 27, the stock is available at 17x on FY16 post issue diluted EPS of We believe GNA has a decent business model (strong customer base & diversified revenue) and financial performance. However, we believe the company is also fairly valued at the IPO price. Page 1

11 Exhibit 17: Profit & Loss statement Income statement () Income Revenue from operations Export Incentives Other Income Total Income Expenditure Raw Material expenses Employee benefits Other expenses Total Expenditure EBITDA Financial charges Depreciation/amortisation PBT Taxation (.9) 13.4 PAT Exhibit 18: Balance Sheet Balance Sheet () Equity Share Capital Reserves & Surplus Total Shareholders Funds Long term borrowings Deferred tax liability (net) Other long term liability Total Non-current liabilities Short term borrowings Trade Payables Other current liabilities Short term provisions Total current liabilities Total Liabilities Fixed Assets Tangible assets Intangible assets Capital work-in-progress Long term loans & advances Non-current Investments Other non-current assets Total non-current assets Inventories Trade receivables Cash and bank balances Short-term loans and advances Other current assets Total Current assets Total Assets Page 11

12 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com Page 12

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