Mission 25 And New Axle Models Expected To Improve Operational Efficiency

Key Takeaways

• The ramp-up of new axle models and focus on heavier vehicle segments aims to boost revenue and market share.
  
• Efforts in modernization and exports, alongside targeting the electric vehicle segment, are set to enhance operational efficiency and diversify revenue streams.
  
• Dependency on Ashok Leyland and ambitious growth plans introduce execution risk amidst a flat M&HCV market and uncertain domestic and export conditions.

Catalysts

Manufactures and sells automotive components in India.

• The successful ramp-up of the MS 185 axle with existing customers is a key operational catalyst, expected to enhance revenue as adoption increases in heavier vehicle segments.
  
• The introduction of new axle models targeted at buses and heavier commercial vehicles is set to broaden the product range, potentially boosting revenue and improving market share as these products roll out.
  
• Modernization and cost optimization efforts under Mission 25 are anticipated to improve operational efficiencies, which could enhance net margins by driving down production costs.
  
• An increased focus on exports as global markets recover is anticipated to drive revenue growth, leveraging Automotive Axles' existing global connections.
  
• A strategic push in the aftermarket and export sectors, including efforts to capture the electric vehicle segment, is expected to bolster revenue and build a more diversified income stream, supporting long-term earnings growth.

Automotive Axles Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Automotive Axles's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.4% today to 6.9% in 3 years time.
• Analysts expect earnings to reach ₹1.7 billion (and earnings per share of ₹112.84) by about March 2028, up from ₹1.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.1x on those 2028 earnings, up from 15.3x today. This future PE is lower than the current PE for the IN Auto Components industry at 26.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.97%, as per the Simply Wall St company report.

Automotive Axles Future Earnings Per Share Growth

Risks

• The M&HCV (Medium & Heavy Commercial Vehicle) market is expected to remain flat from April to March 2026, which could limit revenue growth opportunities.
  
• The domestic market is currently soft, with a slow recovery anticipated in export markets like North America and Europe, potentially affecting future revenue and earnings.
  
• There is significant customer concentration risk with Ashok Leyland, which could impact revenue stability if this client diversifies suppliers or reduces orders.
  
• The planned doubling of revenue by 2029 relies heavily on successful new product launches and a shift in market dynamics, introducing execution risk that could affect earnings.
  
• Recent shareholder rejection of related-party transactions with Meritor HVS poses uncertainty in operations and strategic collaborations, which could impact future margins and earnings.

Valuation

• The analysts have a consensus price target of ₹2003.0 for Automotive Axles based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹24.7 billion, earnings will come to ₹1.7 billion, and it would be trading on a PE ratio of 26.1x, assuming you use a discount rate of 14.0%.
  
• Given the current share price of ₹1558.45, the analyst price target of ₹2003.0 is 22.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.