Buy This Auto Ancillary Stock For 15% Gains In 12 Months

ICICI Direct in its research report has betted on the auto ancillary stock from the small cap space for 15% gains in 12 months. The brokerage considers the stock-Automotive Axles to be well placed for betting on the cyclical recovery seen in the CV space.

Buy This Auto Ancillary Stock For 15% Gains In 12 Months

Business update: The company is co-promoted by Meritor Inc. as well as the Kalyani group, with each owning 35.5% holding in the entity. At the parentlevel, Cummins Inc. has acquired Meritor Inc. valuing Meritor Inc. at US$3.7 billion. Cummins Inc. is now expected to be the new co-promoter in Automotive Axles.

Company Q3Fy22 performance:
The company reported a healthy performance in Q3FY22. Total operating income for Q3FY22 came in at Rs. 374.4 crore, up 21% QoQ. EBITDA came in at | 34.9 crore with margins at 9.3%, up 210 bps QoQ. PAT for the quarter was at Rs.19.8 crore, up 95.6% QoQ.

Brokerage's take on the stock:

We retain BUY rating given robust growth prospects in the CV space and the brokerage values the company at a revised target price of Rs.1730 i.e. 20x P/E on FY24E EPS (earlier TP Rs.1260).

Key triggers seen to drive stock's performance:

-Sound technology support from ex-parent Meritor Inc. with capabilities in the electric vehicles domain (e-axle for heavy duty trucks)
-Cyclical recovery in demand in CV space. We expect sales to grow at a CAGR of appx.27.7% in FY21E-24E to Rs. 1,888 crore in FY24E
-Healthy b/s (net cash positive) and consistent cash generation bode well andare expected to act as a good margin of safety for our investment thesis

About the stock: Automotive Axles (AAL), established in 1981, is largest independent manufacturer of rear axle drive assemblies in India (primarily for CVs, M&HCV). As of FY20, rear drive axles comprise60% of its topline with brakes share at 20% and other parts comprising the rest. The company's major OEM clients include Ashok Leyland, VECV Commercial Vehicles, M&M among others.

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