GNA Axles looks attractive with rising exports, tractor recovery

MUMBAI: Investors may subscribe to initial public offering of GNA Axles, a supplier of rear axle and spindle to auto companies. Rising exports and recovery in the domestic tractor market, a segment where the company has market leadership, offer an attractive value proposition to investors. In addition, the implied IPO valuation looks cheaper than that of peers.

Business Model
GNA manufactures a diverse range of rear axle shafts, other shafts, and spindles for on-highway and offhighway light and heavy commercial vehicles. The contribution of exports has increased to nearly half from one-third in FY12. Its customers include Dana (US, Mexico, and Brazil), John Deere (Spain and USA), Kubota (Japan) and Meritor HVS (Sweden, Italy, Brazil, USA).

The tractor segment contributes two-third to revenue and the balance comes from commercial vehicles.

Financial Picture
Revenue grew by 6.9% annually between FY12 and FY16 to `508 crore, and operating profit rose 12% in the same period due to increasing proportion of the exports. Exports grew by 19.2% annually in the past four years to `275 crore in FY16. This resulted in 323 bps jump in operating margin to 16.2% in the past four fiscals. It plans to introduce new products to increase the share of export.

Valuations
At the upper end of the price band, GNA demands a PE of 17.1 on FY16 earnings. Peer Talbros Engineering trades at a trailing PE of 19.5. GNA has better margin and return on equity than its comparable peers.