By Geetanjali Kedia

GNA Axles is entering the primary market on Wednesday 14th September, 2016, to raise Rs. 130 crore via a fresh issue of 63 lakh equity shares of Rs. 10 each, in the price band of Rs. 205-207 per share. Issue will raise Rs. 130 crore and represents 29.35% of the post issue paid up equity share capital, at the upper end, and closes on Friday 16th September.

GNA Axles is a 23 year old auto component maker manufacturing rear axle shafts, spindles and spindle shafts for commercial vehicles, buses, off-highway vehicles, agricultural and construction equipments. It supplies products to OEMs and Tier-1 suppliers such as M&M, Escorts, John Deere, Tractors & Farm Equipment (TAFE), Automotive Axles, Meritor HVS AB and Dana. It has 2 manufacturing facilities in Punjab, with an aggregate annual capacity of 23 lakh rear axle shafts, of upto 165 kg input weight, 4 lakh other shafts and 3 lakh spindles.

Rear axle shaft is the key product, accounting for ~84% of revenue. Company’s exports, having grown from 35% of revenue in FY12 to 55% in FY16, are mainly to North America (~46% of total exports) and Europe (32%). FY16 total income grew 18% YoY to Rs. 509 crore, while EBITDA jumped 36% to Rs. 83 crore, with EBITDA margin expanding to 16.3% from FY15’s 14.2%, on account of benign raw materials cost. PAT came in at Rs. 26 crore, up 20% YoY, yielding an EPS of Rs. 17.12. Its PAT margin of 5.2%, however, has remain unchanged from last year.

As on 31-03-2016, equity stood at Rs. 15.2 crore, while Net Worth was at Rs. 138 crore. Total Debt stood at Rs. 130 crore, with negligible cash balance, implying a high debt equity ratio of 0.93:1. Its debtors are very slow moving, with outstanding debtors of Rs. 162 crore (31-3-16) representing 3.8 months of sales. Receivables on account of exports have been throughout very high, representing 4.8 months of export sales, as of 31-3-16. Company’s outstanding debtor position has always been precarious, exceeding 3 months of sales for the past 3 years, and it is estimated to be so going forward too. 

Objects of issue include purchase of plant and machinery for existing plants for Rs. 80 crore and working capital funding of Rs. 35 crore. At upper end of the price band, company will have market cap of Rs. 444 crore and EV of Rs. 573 crore. This leads to EV/EBITDA multiple of 6.9x and 6.4x for FY16 and FY17 respectively, and PE multiple of 17.1x for FY16 and 14.7x (on expanded equity base of Rs. 21.47 crore) for FY17.

Automotive Axle, a Kalyani group company having a foreign JV partner holding 36% stake, near debt free status, low retail float of barely 14% and more than double the topline (over 1,200 crore) is commanding EV/EBITDA multiple of 10x and PE multiple of 24x on the bourses, on current year estimates. On the other hand, GNA Axle’s business is very working capital intensive, coupled with high debt levels. 

A smaller peer, Talbros Engineering, with capacity to manufacture 18.3 lakh axle shafts p.a. across 3 manufacturing facilities in Haryana, has tiny equity base of Rs. 2.6 crore and market cap of Rs. 66 crore. Talbros share price has seen sharp rally in past three months, rising by over 40%, and is now trading at FY17 EV/EBITDA multiple of 6.1x and PE multiple of 10.7x, which is cheaper than GNA Axles’ pricing, despite the latter being a primary market offering.

Being an IPO, GNA Axles must offer shares to potential shareholders at a minimum of 15-20% discount to its fair price, which is seen missing in the current pricing. Besides, there is no dearth of ideas in the listed auto ancillary space, players with dominant market position, healthy growth rates and trading at attractive valuations.  

Besides valuations, a couple of internal risk factors also raise red flags:

• There are winding up petitions pending against the company and its subsidiary GNA Gears, filed by RMG Alloy Steel, for non-payment of Rs. 8 crore for supply of raw material, which paints a poor picture, given the quantum of amount involved. An adverse decision can impact both financial position and company reputation.
• Client concentration risk is also high, as 56% of FY16 revenue was generated from 5 customers. Although it is looking to diversify customer base, loss of any customer could dent profitability meaningfully.

Besides offering shares at fair price and not leaving much on the table, in terms of pricing, GNA Axles issue is small in size (vis-à-vis bigger names such as L&T Technology Services and ICICI Prudential Life which open during similar time frame) may be unnoticed and hence fail to attract a lot of investor /analyst interest. Crowding with other bigger IPOs may go against the issue.

To conclude, GNA Axles is not a compelling enough story, and hence the IPO can be skipped.

Disclosure: No Interest.