GNA Axles

Ancillary to commercial vehicle and tractor industry

The company supplies rear axle shafts and spindles to domestic as well as export markets

CM RATING

40/100

Incorporated in 1993, Jalandhar-based GNA Axles (GNA) is among the leading manufacturers of rear axle shafts and spindles. The company’s products are used in on-highway segments like for light commercial vehicles (LCVs), medium commercial vehicles (MCVs) and heavy commercial vehicles (HCVs) and other transport vehicles such as buses and also for the off-highway segments such as for agricultural tractors and machinery, forestry and construction equipments, electric carts and other specialty vehicles used in mining and defense sectors. The company also manufactures solid and hollow sspindles used in the axle assembly for various vehicles and equipments for the export market.

The company has 2 manufacturing facilities located in Punjab with installed capacity of around 2.33 million pieces for rear axle shafts, 0.33 million pieces for spindles and 0.44 million for other shafts as on March 2016. Rear axle contributes around 81% of total sales, spindles around 7% and rest 12% is accounted for by other shafts. The company is currently developing products such as heavy axle shafts for the off-highway segment.

The company has a broad customer base for both the on-highway and off-highway segments and the customers are based in India and overseas. In India, the customers primarily include original equipment manufacturers (OEM) such as Mahindra & Mahindra Limited, John Deere, Tractors and Farm Equipment and tier-1 suppliers to OEMs such as Automotive Axles, Meritor HVS AB and Dana. GNA's major global customers include Meritor HVS AB, John Deere, Transaxle Manufacturing of America, Dana and Kubota Corporation. Top 5 customers constitute around 57% of total sales and top 10 contributes around 74%.

In FY 2016, the company’s domestic sales constitute around 46% of total sales and rest 54% are exports. The company exports to 13 countries including USA, Sweden, Turkey, Brazil, Italy, Germany, Spain, Mexico, Japan, UK, France, China and Australia.

The Offer and the Objects

As on date of the issue, there is no non-promoter shareholding in the company and the promoters (Jasvinder Singh Seehra, Ranbir Singh and Gurdeep Singh) and group holds 100% stake.

The minimum bid lot is 70 equity shares and in multiples of 70 equity shares. The issue is made through a book building process and will open on 14^th September and will close on 16^th September, with anchor Investor bidding date of 12^th September 2016.

Of the issue proceeds, the company intends to purchase plant and machinery worth around Rs 80 crore includings CNC machines, equipment for forging shop, utility and power generator, testing equipments, raw material cutting machines and machines for heat treatment shop and induction shop. Around Rs 35 crore will be utilized to meet the working capital of the company and rest for general corporate purposes.

The new capacity will be operational from Q1 FY 2018 onwards. Current capacity utilization is around 80%.

Strengths

The company has an integrated manufacturing facility across the value chain right from forging, engineering, machining, and quality testing to finished product under one roof, which allows the company to keep a check on quality and maintain delivery schedules.

Exports sale has increased from 35% in FY 2012 to 54% of total sales in FY 2016 as the company leverages its existing established relationship with overseas customers and cross sell its products.

Crisil expects Axle shafts volume and value to grow at CAGR of 10% and 13%, respectively, from FY 2016 to FY 2020 in India. This is after the industry has grown at volume and value by 0% and 1.3% CAGR, respectively, from FY 2011 to FY 2015.

The capacity addition program will take the overall installed capacity from around 3 million pieces to 4 million and will add around Rs 180-200 crore in revenues to the company.

Weaknesses 

The company’s business is heavily dependent on automotive sector particularly, the commercial vehicle industry, whose growth trajectory is relatively more volatile and economy sensitive, compared to other segments of the auto industry.  

While exports have grown at CAGR of around 20% in the past five years, total revenues have grown only at CAGR of around 6% from FY 2011 to FY 2016.

The GNA brand and trademark is not owned by the company, but is owned by the promoter group company.  

Although the contracts with the customers are long term in nature, there is no control of the off-take of production and pricing formulae in a year which depends upon the economic condition and other external factors.

Higher outstanding days of sales which is around 60-75 days for domestic and around 120-140 days for exports, which is leading to higher working capital requirement for the company.

Significant higher jump in exports (grown by 54% in FY 2016) and higher forex gains have led to higher operating profit margin in FY 2016, which may not sustain going forward.

Like any exporter, adverse currency movements can affect the company’s financials

Winding up petitions against the company and another group company GNA Gears are currently pending before the High Court of Punjab and Haryana for alleged non payment of dues to the supplier.

Valuation

For FY 2016, net sales stood at Rs 508.52 crore, up by 18% YoY. The OPM increased 220 basis points to 16.2%, resulting in OP growth of 36% to Rs 82.35 crore. PBT was up by 90% to Rs 39.31 crore. After providing total tax of Rs 13.35 crore (against tax credit of Rs 86 lakh), PAT stood at Rs 25.96 crore, up by 20%. On a diluted equity share capital of the company of Rs 21.47 crore of face value of Rs 10 each, the EPS for FY 2016 works out to Rs 12.1. At a higher price band of Rs 207, GNA is being offered at a P/E of around 17.1 times its FY 2016 earnings.