Automotive Axles (AAL) reported dismal performance in Q4FY08 with sales declining by 15.7% and bottomline by massive 45.8% on the back of slowing commercial vehicles (CVs) sales and timid exports.
In addition to this, its clients mainly Tata Motors and Ashok Leyland have kept their plants closed for few days during the quarter to avoid excessive production as against the demand.
This in turn resulted into lower demand for the company, giving muted performance for quarter, eating up the strong performance demonstrated by the company during first three quarters.
For the full year, ending September 2008, the company reported 22.9% topline growth while at bottomline, its growth was restricted only to 4%.
The de-growth witnessed in commercial vehicles (CVs) and plant shutdown (temporary) announced by major original equipment manufacturers (OEM) are indicators of a bleak outlook for the segment.
Around 75% of revenues is generated from its major clients, Ashok Leyland and Tata Motors, and both companies have reported de-growth of 11%-12% in production due to lacklustre sales performance.
The announcement of fiscal package by government for the industry is the light at the end of the tunnel. The policies announced are positives for the industry growth however stricter lending norms and economy slowdown are the main hurdles for the growth going forward.
We expect CV segment to record around 9-10% de-growth in volumes for FY09 and therefore we are revising our sales and profit estimates for FY09 and FY10.
We expect sales and net profit for FY09 to be at Rs814.8 crore (Rs1.073.6 crore) and Rs45.6 crore (Rs89.5 crore) respectively and that of FY10 to Rs936.4 crore and Rs57.6 crore respectively as against our earlier estimates of Rs1,241.6 crore and Rs108.5 crore.
At market price of Rs117, the stock is trading at very attractive valuations of 3.9x and 3.1x its FY09E and FY10E EPS. Stimulus package is expected to improve CV demand which is very positive for OEMs and thereby companies like AAL.
However, we believe other demand drivers (as mentioned above) need to trigger to push up the demand.
We expect gloomy CV and export sales and therefore would like to watch out for the volume growth and company’s performance for next few quarters.
On conservative basis, we are valuing company at 3x FY10E EPS to arrive at a target price of Rs114 from our earlier target price of Rs 473 and rate the stock an UNDERPERFORMER.