Modernization And Automation Will Support Increased Production Capacity And Efficiency

Key Takeaways

• Expansion into new customer segments and product diversification are expected to boost revenue and mitigate domestic market risks.
  
• Cost optimization and operational efficiencies aim to improve profit margins while supporting increased production capacity and modernization efforts.
  
• Dependence on key customers and market softness are challenges, while exports and governance issues pose risks to achieving ambitious revenue and margin targets.

Catalysts

Manufactures and sells automotive components in India.

• The ramp-up of MS 185 axle production with new customers is underway, which is expected to generate additional revenue due to increased product offerings and expanded client base.
  
• Ongoing cost optimization initiatives under the Mission 25 strategy are expected to maintain or slightly improve net margins through operational efficiencies and supply chain consolidation.
  
• New product development for the bus segment, specifically 9-meter and 13.5-15 meter buses, is anticipated to diversify the product portfolio and increase revenue streams once commercialized.
  
• Expansion of export and aftermarket sales is a key growth strategy, with expectations to grow these segments significantly, contributing to revenue growth and reducing domestic market cyclicality risk.
  
• Modernization and automation of manufacturing facilities, with planned capital expenditure, are expected to support increased production capacity and improve profit margins through enhanced efficiencies.

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 February 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 16.7x today. This future PE is lower than the current PE for the IN Auto Components industry at 29.4x.
• 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 13.95%, as per the Simply Wall St company report.

Automotive Axles Future Earnings Per Share Growth

Risks

• The M&HCV market is expected to be down by about 5% this year, with a forecast of flat growth next year. This could limit revenue growth and impact the company's ability to increase earnings.
  
• The company's revenue for the quarter was slightly down by 1.6% compared to the same quarter last year, indicating challenges in maintaining revenue growth amidst market softness.
  
• The company is reliant on a few major customers, with Ashok Leyland being a significant contributor to its revenues. This customer concentration risk could impact earnings if there are any disruptions or changes in these customer relationships.
  
• The company's exports and aftermarket growth are crucial for doubling revenue by 2030, but current global market conditions are soft, posing a risk to achieving this target which impacts long-term revenue and margin projections.
  
• The related party transactions with Meritor HVS India and complex JV structures could pose governance risks and influence operational decisions, potentially impacting net margins.

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 13.9%.
  
• Given the current share price of ₹1694.9, the analyst price target of ₹2003.0 is 15.4% 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.