Religare Investment Call

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1 BUY CMP (Rs) Target Price (Rs) Potential Upside Sensex Nifty Key Stock data BSE Code NSE Code Bloomberg Shares o/s, Cr (FV 10) Market Cap (Rs Cr) 3M Avg Volume 52 week H/L Shareholding Pattern (%) Promoter FII DII Others 1 Year relative price performance Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Research Analyst Dec Feb-17 Mar-17 Ajay Pasari, CFA ajay.pasari@religare.com September 29, 2017 Apr % 31,407 9, GNA GNA:IN , /172 Mar-17 Jun May-17 Jun-17 Nifty Jul Aug-17 Sep-17 (Axle)rated growth ahead Established in 1993, is amongst the leading manufacturers of rear axle shafts used in on-highway and off-highway vehicular segments in India. It manufacture and supply 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 and supplies a diverse range of rear axle shafts and other shafts for the off-highway segment, i.e. for agricultural tractors and machinery, forestry and construction equipments, electric carts and other specialty vehicles used in mining and defense sectors. Investment rationale GNA supplies variety of rear axle shafts for tractors and CVs for both domestic and export markets. It has the capacity to manufacture rear axle shafts of up to 165 kg input weight. It commands ~50% domestic market share. GNA derived 79.7% of its total revenue from Rear axles in FY17. GNA is expanding its axle capacity for which it has already incurred a capex of Rs 20 cr and more Rs. 60 cr will be incurred in FY18E. The axle capacity is being increased from 2.3 million pieces in FY17 to 4 million pieces in FY18E. It is funding its capex through IPO proceedings garnered last year. GNA is also planning to venture into production of axles for LCV and SUVs for both domestic and international markets. In the on-highway domestic segment, GNA caters to tier-i suppliers like Dana Ltd, Automotive Axles Ltd and Meritor HVS AB. In the off-highway domestic segment it caters to marquee OEMs namely; M&M, TAFE, Escorts, John Deere and Claas India Private Limited. The company enjoys a 60% market share in the domestic tractor market. The management has guided ~8% growth in domestic revenues in FY18E on back of ~10% growth in tractor sales, while CVs are likely to remain flat. Exports are likely to grow by ~25-30% with North America leading the way as Class VIII trucks have been showing healthy growth compared to last year. Outlook & Valuation commands 50% market share in the domestic rear axle shafts and is currently expanding its capacity to fulfill the increasing demand for rear axles. In domestic market, tractors saw good demand in H1FY18 (till date), whereas Commercial vehicles saw decline in growth due to GST implementation transition. We expect demand for commercial vehicles to pick up in H2FY18E and remain healthy in the coming years on back of rising infra spending, reducing finance cost and expected revival in private investment. On export front, with recovery in global economies namely, US and Europe, we expect demand for commercial automobile vehicles to remain strong in the next 2-3 years. Also, operational leverage benefits will increase profitability in the next 2-3 years. We expect Revenue and PAT CAGR of 13.8% and 23.2% respectively over FY17-19E. Given strong business outlook, demand revival, capacity expansion, entry into new product category and improving margins, we recommend a Buy on the stock with a target of Rs Financial Summary Particulars, Rs cr Net revenue EBITDA OPM (%) Adj PAT PATM (%) EPS, Rs RoE (%) P/E (x) FY16 FY17 FY18E

2 Investment rationale Leader in domestic Rear axle manufacturing: commands 50% market share in the domestic market and caters t o 6 0 % o f d o m e s t i c t r a c t o r requirement GNA is currently expanding its rear axle capacity from 2.5 mn units in FY17 to 4 mn units in FY18E is the leading manufacturer of rear axle shafts used in on-highway and offhighway vehicular segments in India. The company supplies rear axle shafts for tractors and CVs for both domestic and export markets. It currently manufactures a large variety of rear axle shafts and has the capacity to manufacture rear axle shafts of up to 165 kg input weight. It commands ~50% domestic market share. GNA derived 79.7% of its total revenue from Rear axles in FY17. Generally, in commercial vehicles and agricultural tractors, the rear axle acts as the liveaxle and the front axle acts as the non-drive axle. Rear axle shaft is a part of the rear axle assembly and helps in transmitting the driving torque to the wheels. GNA manufactures and supplies a diverse range of rear axle shafts in the on-highway segment, for light, medium and heavy commercial vehicles including transport vehicles such as buses. It also manufactures and supplies a diverse range of rear axle shafts in the off-highway segment, for tractors, forestry and agriculture machinery, construction equipments, electric carts and other specialty vehicles used for mining and defense. The company is expanding its axle capacity for which it has already incurred a capex of Rs 20 cr and further Rs. 60 cr will be incurred in FY18E. The axle capacity is being increased from 2.3 million pieces in FY17 to 4 million pieces in FY18E. At peak utilization, this would result in an incremental turnover of Rs cr (Rear axle revenue Rs. 410 cr in FY17). The company is funding its capex through IPO proceedings (fresh issue of Rs. 119 cr) garnered last year. We expect the company to maintain its market share in the domestic market with increasing capacity and healthy demand from tractor and commercial vehicles (CV demand to revive in H2FY18E). Being a leader in domestic rear axle shaft, it derives ~80% of its revenues from rear axles 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY13 FY14 FY15 FY16 FY17 Rear axle shafts Spindles Other shafts The company offers diverse range of rear shafts, spindles and other shafts used in on-highway and off-highway vehicles Diversified products range and robust clientele: manufactures and supplies a diverse range of rear axle shafts, other shafts and spindles for the on-highway and off-highway segments, which are used in LCVs, MCVs, tractors, construction equipments, etc. It manufactures solid and hollow spindles used in the axle assembly for various vehicles and equipments in the on-highway segment, which it exports to customers in over 13 countries.

3 G N A h a s d e v e l o p e d l o n g t e r m relationship with its clients, which include prominent OEMs like M&M, Escorts, John Deere, etc. Top 5 clients account for 67% of domestic revenues, which makes it a preferred supplier and builds long term relationship with its customers. In the domestic market, under the onhighway segment, GNA caters to tier-i suppliers like Dana Ltd, Automotive Axles Ltd and Meritor HVS AB. In the off-highway domestic segment, it caters to OEMs namely; M&M, TAFE, Escorts, John Deere and Claas India Private Limited. Global market expansion has helped GNA to address the same clients' needs in multiple geographies thereby deepening the relationship further. It exports rear axle shafts, other shafts and spindles to various countries including USA, Sweden, Turkey, Brazil, Italy, Germany, Spain, Mexico, Japan, UK, France, China and Australia. GNA's major global customers include Meritor HVS AB, John Deere, Transaxle Manufacturing of America, Dana Limited and Kubota Corporation. Diversified product range- Rear axle shaft, spindles and other shafts Rear axle shafts Other shafts Exports demand to drive revenue growth: Spindles Source : Company GNA has balanced mix of revenue geographically with domestic and export revenues contributing 50% each Gradual recovery in European and American economies will drive export growth Exports and domestic revenues account for 50% of total revenue each. In the domestic market, 80% of the revenues come from the tractor segment and the balance from Commercial vehicles segment. In the overseas market the mix is reverse. On the whole, revenues are split almost equally between tractors and CVs. Top 5 clients account for 67% of the domestic revenues. The company enjoys a 60% market share in the domestic tractor market. The management has guided ~8% growth in domestic revenues in FY18E on back of ~10% growth in tractor sales, while CVs are likely to remain flat. Exports are likely to grow by ~25-30% with North America leading the way as Class VIII trucks have been showing healthy growth compared to last year. The company is highly focused on increasing its export sales in the coming years, given visible recovery in America and European countries. The current capacities stand at 3.5 mn units in Axle Shafts, 0.4 mn units in spindles and 0.3 mn units in Drive shafts. Despite being the domestic market leader, a subdued demand scenario has led to a marginal growth (2% CAGR in FY12-17 period to Rs. 279 cr in FY17) locally. However, access to global market has helped exports grow at 11.4% CAGR (Rs. 234 crin FY17) aiding the overall revenue to grow at 5.2% CAGR in FY12-17 period (at Rs. 513 cr in FY17). We expect export growth to remain healthy in the coming years due to recovery in global economy and automotive demand.

4 Steady domestic revenues in the past few years Rising export revenues over the years Domestic revenue reported 2% CAGR, whereas export revenues reported 11.4% CAGR over FY FY13 FY14 FY15 FY16 FY FY13 FY14 FY15 FY16 FY17 Domestic (Rs. In Cr) Exports (Rs. In Cr) Geographical revenue breakup- FY % 8.9% 45.3% 32.5% Europe North America South America Others Higher capacity utilization to improve margins: GNA is looking to enter in the production of axle shafts for LCVs and SUVs, the production of which is expected to commence in FY20E has two manufacturing facilities located in village Mehtiana and village Gulabgarh Jattan, Punjab. Its plants are operating at ~80% utilization levels, which we expect to improve with healthy demand growth in the coming years. The company is also expanding its rear axle capacity to meet the rising demand. GNA is also planning to venture in production of axles for LCV and SUVs for both domestic and international markets for which it has already bought land for Rs 30 cr and will invest further in machinery. The commercial production of the same is expected to start from FY20E. The company has reduced its total debt from Rs. 182 cr in FY15 to Rs. 99 cr in FY17, which we expect to remain around the same levels in the next 2-3 years, as it is looking to enter new segments i.e. LCV and SUV. On back of operational leverage, we expect the profitability margins to improve over FY18-20E.

5 Revenue to grow at CAGR of 9.4% led by exports growth 700 3% % 25.0% 2% % 14.0% 15.0% % 1.0% FY15 FY16 FY17 FY18E 1% 5.0% % Revenue- Rs. Cr (LHS) Growth % (YoY) - (RHS) Operational margins to improve over FY18-19E Operational leverage to boost profitability % 16.2% 15.7% 15.8% 13.2% FY15 FY16 FY17 FY18E 18.0% 17.0% 16.0% 15.0% 14.0% 13.0% 12.0% 11.0% % 6.8% 5.8% 5.1% 3.5% FY15 FY16 FY17 FY18E 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% EBITDA- Rs. Cr (LHS) EBITDA % (RHS) PAT- Rs. Cr (LHS) PAT % (RHS)

6 Company background Established in 1993, is among the leading manufacturers of rear axle shafts used in on-highway and off-highway vehicular segments in India. It manufactures and supplies 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 and supplies a diverse range of rear axle shafts and other shafts for the offhighway segment, i.e. for agricultural tractors and machinery, forestry and construction equipments, electric carts and other specialty vehicles used in mining and defense sectors. Products Rear Axle Shafts Rear axle shafts are the primary products of the company. Axle is a part of transmission assembly of an automobile. The main purpose of axle is to bear the weight of the vehicle and also maintain the position of the 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 onto the wheels via the drive shaft. Rear axle shaft is a part of the rear axle assembly and helps in transmitting the driving torque to the wheels. Spindles Spindle is a part of axle housing assembly of an automobile. The main purpose of the spindle is to transmit torque. Spindles manufactured by it are currently supplied to export customers. Other Shafts It also manufactures other shafts including drive shafts, power take-off shafts, hydraulic lift shafts, and transmission shafts. These shafts are a part of transmission assembly of an automobile. Drive shaft is a mechanical component for transmitting torque and rotation, usually used to connect other components of a drive train that cannot be connected directly because of distance or the need to allow for relative movement between them. Risks derives 67% of its domestic revenue from its top 5 clients. Thus concentration of clients is risky, as any negative impact on a client's business growth will have a direct impact on GNA's business. There is gradual recovery seen in both domestic and international automotive markets. However, any further slowdown in the demand for automobiles would adversely impact the company's revenue and profitability. Steel is the key raw material required to make its products. Any volatility in steel prices could impact the company's profitability, as the pass through is done with a lag.

7 P&L Account- consolidated Particulars, Rs cr FY16E FY17E FY18E Net revenue Expenditure Raw material consumed Employee cost Other expenses Total expenditure EBITDA OPM (%) Other income Depreciation PBIT Interest expenses PBT Exceptional items Tax Tax rate % PAT PATM (%) EPS Balance sheet- consolidated Particulars, Rs cr FY16P FY17E FY18E Share Capital Reserves & Surplus Total Shareholder's Fund Non-Current Liabilities Long term borrowing Deferred tax liability Current Liabilities Short term borrowing Trade payables Short term provisions Other current liabilities Total liabilities Fixed Assets Non Current investment Long Term loans & advances Other non-current assets Current Assets Inventories Trade receivables Cash & Cash equivalents Short term loans and advances Total assets

8 Cash Flow statement- consolidated Particulars, Rs cr FY16P FY17E FY18E Profit Before Tax Add: Depreciation Add: Interest cost Others Op profit before working capital changes Changes In working Capital Direct taxes Cash Flow From Operating Activities Cash Flow from Investing Activities Purchase of Fixed assets Sale of Fixed assets Cash Flow from Investing Activities Cash from Financing Activities Proceeds from issuance of shares Net proceeds from borrowings Dividend (incl dividend tax) Interest cost Others Cash Flow from Financing Activities Net Cash Inflow / Outflow Opening Cash & Cash Equivalents Closing Cash & Cash Equivalent Key Financial ratios- consolidated Particulars, Rs cr FY16P FY17E FY18E EPS Rs Book Value per share Rs Profitability Ratios EBITDA / Total income (%) PBT/Total income (%) NPM / Total income (%) ROCE (%) ROE (%) Liquidity ratios Debt-Equity Ratio Current Ratio Interest Cover Ratio Turnover ratios Total Asset Ratio Fixed Assets Ratio Debtors Velocity Overall (Days) Inventory (Days) Creditors Velocity (Days) Cash Conversion cycle GROWTH YOY% Sales Growth % Operating Profit % Net Profit Growth % VALUATION P / E Ratio P / BV Ratio EV / EBITDA

9 Before you use this research report, please ensure to go through thedisclosure inter-alia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 and Research Disclaimer at the following link : Specific analyst(s) specific disclosure(s) inter-alia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 is/are as under: Statements on ownership and material conflicts of interest, compensation Research Analyst (RA) [Please note that only in case of multiple RAs, if in the event answers differ inter-se between the RAs, then RA specific answer with respect to questions under F (a) to F(j) below, are given separately] S. No. Statement Answer Tick appropriate YES I/we or any of my/our relative has any financial interest in the subject company? [If answer is yes, nature of Interestis given below this table] I/we or any of my/our relatives, have actual/beneficial ownership of one per cent. or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report or date of the public appearance? I / we or any of my/our relative, has any other material conflict of interest at the time of publication of the research report or at the time of public appearance? I/we have received any compensation from the subject company in the past twelve months? I/we have managed or co-managed public offering of securities for the subject company in the past twelve months? I/we have received any compensation for brokerage services from the subject company in the past twelve months? I/we have received any compensation for products or services other than brokerage services from the subject company in the past twelve months? I/we have received any compensation or other benefits from the subject company or third party in connection with the research report? I/we have served as an officer, director or employee of the subject company? I/we have been engaged in market making activity for the subject company? Nature of Interest ( if answer to F (a) aboveis Yes :... Name(s)with Signature(s)of RA(s). [Please note that only in case of multiple RAs andif the answers differ inter-se between the RAs, then RA specific answer with respect to questions under F (a) to F(j) above, are given below] SS.No Name(s) of RA Signatures of RA Serial Question of question which the signing RA needs to make separate declaration / answer YES Copyright in this document vests exclusively with RSL. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose, without prior written permission from RSL. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Disclaimer: