Buy Automotive Axles – HDFC Sec

Kalyani Group company Automotive Axles (AAL) is well placed to benefit from the ongoing recovery in medium and heavy commercial vehicles (MHCV). AAL’’ product portfolio consists mainly of higher margin axle assemblies, while it also manufactures axle housings. It is is India’s largest independent manufacturer of rear drive axle assemblies and its top clients include Ashok Leyland and Tata Motors.

AAL has emerged well out of the recent downturn and with MHCV demand remaining buoyant we expect FY09-12E revenues to grow at 40% CAGR. Margin expansion coupled with lower interest costs are set to drive a strong 81% earnings CAGR. Expect AAL’s capacity utilization to improve from 20-35% in FY09 closer to 60-75%, driving a robust 40% revenue CAGR over FY09-12E. Margin expansion, coupled with lower interest costs should drive our forecasted 81%
earnings CAGR over the same period.

AAL is expcted to report an ePS of Rs 20 and Rs 31 for Fy10 and Fy11 respectively. HDFC Institutional research has set a target price of Rs478 which offers 40% upside and is based on a 5-year average trading PE multiple of 15.8x 1-year forward earnings.