1QSY2013 Result Update | Auto Ancillary

February 7, 2013

Automotive Axles
Performance Highlights
Y/E September (` cr) Net Sales EBITDA EBITDA Margin (%) Adj. PAT
Source: Company, Angel Research

NEUTRAL
CMP Target Price
% chg (yoy) (32.2) (50.5) (343)bp (69.2) 4QSY12 170 9 5.2 0 % chg (qoq) 16.5 106.9 405bp 7,003.5

`363 -

1QSY13 198 18 9.3 6

1QSY12 293 37 12.7 20

Investment Period
Stock Info Sector Market Cap (` cr)
Net Debt (` cr)

Auto Ancillary 584 43 0.3 560/309 2,093 10.0 19,580 5,939 ATOA.BO ATXL@IN

Automotive Axles (ATXL) reported better-than-expected results for 1QSY2013, driven by sharp improvement in operating performance on a sequential basis with EBITDA margins witnessing an expansion of 405bp to 9.3%. We revise upwards our EBITDA margin estimates for SY2013 to factor in the strong performance during the quarter. We expect the growth outlook for the MHCV industry, which is the key driver of ATXLs revenues, to remain challenging for the most part of SY2013E. However, the expected easing of interest rates will revive MHCV demand in SY2014, leading to a revival in the companys performance. Nevertheless, we believe that the current valuation, to some extent, factors in the growth revival in SY2014. We therefore maintain our Neutral rating on the stock. Better-than-expected operating performance: For 1QSY2013, the top-line posted a strong sequential growth of 16.5% to `198cr despite a 22.3% qoq decline in MHCV industry volumes, which is the key driver of the companys revenues. The EBITDA margin improved 405bp sequentially, primarily due to a 520bp decline in raw-material expense as a percentage of sales. However, on a yoy basis, the top-line declined substantially by 32.2%, in-line with the 31.6% yoy decline in MHCV volumes. Led by lower utilization levels which reduced the operating leverage benefits, EBITDA margin contracted 343bp yoy. As a result, the operating profit and net profit declined significantly by 50.5% and 69.2% yoy to `18cr and `6cr respectively. Outlook and valuation: During SY201214, we expect ATXL to report a modest CAGR of ~8% and ~7% in its top-line and bottom-line, respectively. We believe that the current valuation of 10.6x SY2014E earnings captures the expected revival in earnings growth in SY2014. Due to limited upside from current levels, we maintain our Neutral rating on the stock.

Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 71.0 20.5 0.4 8.1

Abs. (%) Sensex Automotive Axles

3m 3.6 (4.5)

1yr 11.1 (23.6)

3yr 23.0 0.8

Key financials (Standalone)

Y/E September (` cr) Net Sales % chg Net Profit % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

SY2011 1,012 51.6 58 30.6 11.5 38.1 9.5 2.2 25.7 31.4 0.6 5.0

SY2012 941 (7.1) 45 (21.8) 10.8 29.8 12.0 2.0 17.5 23.3 0.6 5.8

SY2013E 934 (0.7) 37 (17.7) 10.2 24.5 14.8 1.9 13.2 18.6 0.6 6.3

SY2014E 1,103 18.0 52 40.0 10.7 34.3 10.6 1.7 16.9 22.7 0.5 4.9

Yaresh Kothari
022-3935 7800 Ext: 6844 yareshb.kothari@angelbroking.com

Please refer to important disclosures at the end of this report

Automotive Axles | 1QSY2013 Result Update

Exhibit 1: Quarterly financial performance (Standalone)

Y/E September (` cr) Net Sales Consumption of RM (% of sales) Staff Costs (% of sales) Other Expenses (% of sales) Total Expenditure Operating Profit OPM (%) Interest Depreciation Other Income PBT (excl. Extr. Items) Extr. Income/(Expense) PBT (incl. Extr. Items) (% of sales) Provision for Taxation (% of PBT) Reported PAT Adj. PATM Equity capital (cr) Reported EPS (`)
Source: Company, Angel Research

1QSY13 198 139 70.1 15 7.6 26 13.0 180 18 9.3 2 8 0 9 9 4.6 3 33.0 6 3.1 15.1 4.0

1QSY12 293 208 71.1 14 4.9 33 11.3 255 37 12.7 2 6 0 29 29 9.8 9 31.3 20 6.7 15.1 13.1

% chg (yoy) (32.2) (33.1) 5.4 (21.7) (29.5) (50.5) (20.1) 23.8 65 (68.4) (68.4) (66.8) (69.2)

4QSY12 170 128 75.3 12 7.1 21 12.4 161 9 5.2 2 7 0 0 0 0.1 0 61.7 0 0.1 15.1

% chg (qoq) 16.5 8.5 24.7 22.3 11.5 106.9 10.3 4.9 (27) 3,961.1 3,961.1 2,071.3 7,003.5

SY2012 940 672 71.5 56 6.0 111 11.8 839 101 10.7 9 27 2 67 67 7.1 22 32.4 45 4.8 15.1

SY2011 1,012 730 72.1 53 5.2 114 11.2 896 117 11.5 7 23 1 87 87 8.6 30 33.9 58 5.7 15.1 38.1

% chg (yoy) (7.1) (7.9) 6.9 (2.4) (6.3) (13.5) 40.9 17.1 373.9 (23.6) (23.6) (27.1) (21.8)

(69.2)

0.1

7,003.5

29.8

(21.8)

Top-line at `198cr: For 1QSY2013, ATXLs top-line posted a strong sequential growth of 16.5% to `198cr despite a 22.3% qoq decline in MHCV industry volumes, which is the key driver of companys revenues. However, on a yoy basis, the top-line declined substantially by 32.2%, in-line with the 31.6% yoy decline in MHCV volumes.

Exhibit 2: MHCV sales down 31.6% yoy...

(units) 120,000 100,000 80,000 60,000 40,000 20,000 0
18.1

Exhibit 3: ... leading to a 32.2% yoy decline in top-line

(%) 30.0 20.0 (`cr) 350 300 250 200 150 100 50 0
179 278 274 281 293 296

MHCV volume
106,581 80,816
13.0 6.5 6.5

yoy change (RHS)

111,646

Net sales 68.3 63.3 31.7 39.6

yoy growth (RHS) 63.0

(%) 80.0 60.0 40.0

81,791

92,901 90,280
11.7 4.8

71,335

79,536 61,781

10.0 0.0 (10.0)

6.3

20.0 0.0 (33.6)

182

(12.8)

(14.4)

(31.6)

(20.0) (30.0) (40.0)

(39.4)
170

(32.2)
198

(20.0) (40.0) (60.0)

1QSY11

2QSY11

3QSY11

4QSY11

1QSY12

2QSY12

3QSY12

4QSY12

1QSY11

2QSY11

3QSY11

4QSY11

1QSY12

2QSY12

3QSY12

4QSY12

Source: Company, Angel Research

1QSY13

Source: Company, Angel Research

February 7, 2013

1QSY13

Automotive Axles | 1QSY2013 Result Update

Operating margins recovers sequentially: For 1QSY2013, the companys EBITDA margin improved ~400bp sequentially, primarily due to a 520bp decline in rawmaterial expense as a percentage of sales. However lower utilization levels on a yoy basis reduced the operating leverage benefits. Hence the EBITDA margin contracted ~340bp yoy. As a result, operating profit and net profit declined significantly by 50.5% and 69.2% yoy to `18cr and `6cr respectively.

Exhibit 4: EBITDA margin trend

(%) 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 12.4 12.5 12.5 9.0 12.7 12.5 9.9 5.2 9.3 71.0 71.9 70.0 74.9 71.1 71.6 75.3 68.3 70.1 EBITDA margin Raw material cost/sales

Exhibit 5: Net profit down 66.5% yoy

(` cr) 25 20 15 10 5 0
9.8 18.4 17.7 11.7 19.7 19.3 5.9

Net profit 6.6 5.4 4.1 6.5 6.7

Net profit margin (RHS) 6.5

(%) 8.0 7.0 6.0 5.0

3.3

3.1

4.0 3.0 2.0

0.1 0.1

6.1

1.0 0.0

1QSY11

2QSY11

3QSY11

4QSY11

1QSY12

2QSY12

3QSY12

4QSY12

1QSY13

1QSY11

2QSY11

3QSY11

4QSY11

1QSY12

2QSY12

3QSY12

4QSY12

Source: Company, Angel Research

Source: Company, Angel Research

February 7, 2013

1QSY13

Automotive Axles | 1QSY2013 Result Update

Investment arguments
Slowdown in the MHCV segment to restrict top-line growth: ATXL derives ~95% of its revenue from the MHCV segment, which has witnessed decline in growth in recent times due to relatively high interest rates and slowdown in industrial activity. Declining raw-material prices to help maintain operating margins: The recent trend of stable to declining raw-material prices is expected to mitigate the negative impact of decline in volume off-take in SY2013. We expect operating margins to remain in the range of 10-11% over SY2013 and SY2014.

Outlook and valuation

We revise upwards our EBITDA margin estimates for SY2013 to factor in the strong performance during the quarter. We expect the growth outlook for the MHCV industry, which is the key driver of ATXLs revenues, to remain challenging for most part of SY2013. However, expected easing of interest rates will revive MHCV demand in SY2014 leading to revival in the companys performance. During SY201214, we expect ATXL to report a modest CAGR of ~8% and ~7% in its top-line and bottom-line, respectively. We believe that the current valuation of 10.6x SY2014E earnings captures the expected revival in earnings growth in SY2014. Hence, we maintain our Neutral rating on the stock. Key risk: Lower-than-expected growth in the CV segment (specifically the MHCV segment), due to lower IIP, poses a downside risk to our growth estimates.

Exhibit 6: Key assumptions

Y/E September (` cr) Gross revenue Complete axles Brake Shoe/Spares/Others Axle Housing Brakes business (recently acquired)
Source: Company, Angel Research

SY2009 SY2010 SY2011 SY2012 SY2013E SY2014E 291 211 14 66 732 609 40 83 1,111 829 156 37 89 1,042 711 234 34 64 1,028 692 234 34 69 1,214 812 284 39 78

February 7, 2013

Automotive Axles | 1QSY2013 Result Update

Exhibit 7: One-year forward P/E band

(`) 1,000 900 800 700 600 500 400 300 200 100 0 Share Price (`) 8x 13x 18x 23x

Exhibit 8: One-year forward P/E chart

(x) 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 One-yr forward P/E Three-yr average P/E

Jun-07

Aug-05

Mar-11

Oct-03

Apr-10

Sep-04

May-08

May-09

Feb-12

Jan-13

Jul-06

Dec-07

Jun-06

Aug-08

Mar-07

Nov-10

Oct-05

Feb-10

Source: Company, Bloomberg, Angel Research

Source: Company, Bloomberg, Angel Research

Exhibit 9: Auto Ancillary Recommendation summary

Company Amara Raja Batteries Automotive Axle Bharat Forge* Bosch India# Exide Industries FAG Bearings# Motherson Sumi* Subros
^

Reco. Accumulate Neutral Buy Accumulate Accumulate Buy Neutral Buy

CMP (`) 299 363 226 9,023 122 1,420 191 27

Tgt. price (`) 323 278 9,570 131 1,807 35

#

Upside (%) 8.1 22.9 6.1 6.9 27.3 32.2

P/E (x) FY13E FY14E 16.2 14.8 12.1 22.8 20.9 11.1 23.8 10.3
^

EV/EBITDA (x) FY13E 10.2 6.3 6.0 13.9 11.2 6.3 9.2 4.3 FY14E 9.1 4.9 5.0 11.7 8.1 5.0 7.5 3.8 13.9 10.6 9.8 19.8 15.6 9.4 18.1 5.3

May-09

RoE (%) FY13E 32.9 13.2 18.5 18.8 15.4 21.7 22.9 5.6 FY14E 29.1 16.9 19.7 18.2 18.2 21.1 24.7 10.3

FY12-14E EPS CAGR (%) 30.8 7.4 14.6 19.5 20.2 21.6 56.2 0.2

Source: Company, Angel Research; Note: * Consolidated results;

December year end;

September year end

Company background
Automotive Axles (ATXL), a JV between Kalyani Group and Meritor Heavy Vehicle Systems, USA (35.5% stake each), is one of India's largest independent manufacturers of rear drive axle assemblies. ATXL's product portfolio includes a wide range of rear drive axles and air brakes, which are used in commercial vehicles. In SY2011, ATXL also forayed into the automotive brakes business by acquiring a brake manufacturing facility from Kalyani Global Engineering for `14.6cr; it currently forms ~23% of ATXL's total revenue. The company exports to the US, France, Italy, China, Australia and Brazil. Exports account for 6% of the company's total revenue. ATXL's domestic clients include Ashok Leyland (~55% of revenue), Tata Motors (~25% of revenue), Eicher Motors, Asia Motor Works and Indian army, amongst others.

February 7, 2013

Apr-12

Jan-13

Jul-11

Automotive Axles | 1QSY2013 Result Update

Profit and loss statement (Standalone)

Y/E September (` cr) Total operating income % chg Total expenditure Net raw material costs Other mfg costs Employee expenses Other EBITDA % chg (% of total op. income) Depreciation & amortization EBIT % chg (% of total op. income) Interest and other charges Other income Recurring PBT % chg Extraordinary items PBT (reported) Tax (% of PBT) PAT (reported) ADJ. PAT % chg (% of total op. income) Basic EPS (`) Adj. EPS (`) % chg SY09 266 (64.3) 234 181 29 7 18 32 (70.1) 12.0 19 13 (84.4) 5.0 5 4 13 (85) (0) 13 3 23.7 10 10 (82.7) 3.6 6.4 6.4 (82.7) SY10 668 150.8 581 474 48 13 48 87 171.1 13.0 21 66 388.2 9.8 4 4 66 420 0 66 22 33.1 44 44 356.2 6.6 29.1 29.2 356.2 SY11 1,012 51.6 896 729 64 22 81 117 34.9 11.5 23 93 42.4 9.2 7 1 87 32 (0) 87 30 33.9 58 58 30.6 5.7 38.1 38.1 30.6 SY12 941 (7.1) 839 672 70 21 76 102 (12.9) 10.8 27 74 (20.4) 7.9 10 2 67 (24) (1) 67 22 32.1 46 45 (21.8) 4.8 30.1 29.8 (21.8) SY13E 934 (0.7) 840 671 70 22 77 95 (6.8) 10.2 31 64 (13.7) 6.9 11 3 55 (17) 55 18 33.0 37 37 (17.7) 4.0 24.5 24.5 (17.7) SY14E 1,103 18.0 985 789 82 26 88 118 24.4 10.7 34 84 31.6 7.7 10 4 77 40 77 26 33.0 52 52 40.0 4.7 34.3 34.3 40.0

February 7, 2013

Automotive Axles | 1QSY2013 Result Update

Balance sheet statement (Standalone)

Y/E September (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders funds Total loans Deferred tax liability Other long term liabilities Long term provisions Total Liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net Block Capital work-in-progress Investments Long term loans and advances Other noncurrent assets Current assets Cash Loans & advances Other Current liabilities Net current assets Total Assets
Source: Company, Angel Research

SY09 15 160 175 45 14 234 276 131 145 7 146 9 11 127 64 82 234

SY10 15 189 204 71 14 288 281 149 133 8 234 9 11 214 87 147 288

SY11 15 229 244 49 12 1 306 317 171 146 4 13 327 11 15 301 184 143 306

SY12 15 256 271 45 12 2 331 361 185 176 19 12 1 288 2 32 253 163 124 331

SY13E 15 276 291 52 12 2 357 404 216 188 20 12 1 316 7 34 275 180 136 357

SY14E 15 310 325 48 12 2 387 443 250 193 22 12 1 382 21 39 323 223 160 387

February 7, 2013

Automotive Axles | 1QSY2013 Result Update

Cash flow statement (Standalone)

Y/E September (` cr) Profit before tax Depreciation Change in working capital Others Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in fixed assets (Inc.)/Dec. in investments Other income Cash Flow from Investing Issue of equity Inc./(Dec.) in loans Dividend paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in cash Opening Cash balances Closing Cash balances SY09 13 19 0 11 (4) (3) 35 (1) 4 3 (27) 5 (27) (48) (11) 19 9 SY10 66 21 (70) 1 (4) (22) (8) (7) 4 (3) 25 15 (30) 11 0 9 9 SY11 87 23 7 (15) (1) (30) 72 (32) 1 (31) (21) 18 (35) (38) 2 9 11 SY12 67 27 10 13 (2) (22) 94 (59) 2 (57) (4) 18 (35) (22) (9) 11 2 SY13E 55 31 (7) (3) (18) 59 (45) 3 (42) 7 18 (11) 5 2 7 SY14E 77 34 (10) (4) (26) 72 (40) 4 (37) (4) 18 (22) 14 7 21

February 7, 2013

Automotive Axles | 1QSY2013 Result Update

Key ratios
Y/E September Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) 0.2 1.2 2.7 0.3 0.7 17.6 0.2 0.3 13.8 0.2 0.4 7.6 0.2 0.5 5.7 0.1 0.2 8.1 1.0 101 91 96 97 2.4 41 52 33 58 3.4 36 57 41 49 2.8 40 68 59 49 2.4 40 68 58 49 2.6 39 68 59 44 5.5 6.0 5.6 25.1 23.5 23.3 31.4 31.6 25.7 23.3 22.6 17.5 18.6 18.3 13.2 22.7 23.0 16.9 5.0 0.8 1.2 4.4 6.4 0.3 3.9 9.8 0.7 2.6 17.4 4.3 0.3 20.8 9.2 0.7 3.5 21.5 7.5 0.2 24.6 7.9 0.7 3.0 16.2 14.1 0.2 16.5 6.9 0.7 2.8 12.7 15.6 0.2 12.2 7.7 0.7 3.1 15.8 14.0 0.1 16.0 6.4 6.4 18.6 2.7 115.6 29.1 29.2 43.0 8.5 134.9 38.1 38.1 53.6 10.0 161.4 30.1 29.8 48.2 10.0 179.6 24.5 24.5 44.8 10.0 192.4 34.3 34.3 56.6 10.0 215.0 56.8 19.5 3.1 0.8 2.2 18.3 2.5 12.5 8.4 2.7 2.3 0.9 7.0 2.1 9.5 6.8 2.2 2.8 0.6 5.0 1.9 12.0 7.5 2.0 2.8 0.6 5.8 1.8 14.8 8.1 1.9 2.8 0.6 6.3 1.7 10.6 6.4 1.7 2.8 0.5 4.9 1.5 SY09 SY10 SY11 SY12 SY13E SY14E

February 7, 2013

Automotive Axles | 1QSY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Automotive Axles No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

February 7, 2013

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