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GNA Axles IPO - Should you subscribe?

A sturdy auto components maker but with potholes that shouldn't be missed. Read our questionnaire to know more

GNA Axles - Should you subscribe?

Guru Nanak Auto (or GNA) Axles makes axles, spindles and other shafts - all of which are auto components. It makes them for commercial vehicles such as trucks and vans as well as 'off highway' vehicles such as tractors and construction equipment. 55% of its revenues come from exports and the balance from domestic sales. The share of exports has steadily grown from 35% in FY 2012 on account of the slowdown in India.

Its revenues were also highly concentrated among a few large clients, though this has come down over the years. Its top 10 customers still contribute a worrying 89% though this is likely to to be function of its size and industry. Last year, the company made about ₹26 crores of profit on about ₹508 crores of revenue - a rather uninspiring margin. Raw Materials (think steel) accounted for a lion's share of costs - about 65%. The company has about ₹130 crores of debt, nearly equal to its net worth. Its debt relative to equity has come down but remains worryingly high. This is a family owned and managed company. Its Chairman and Managing Director are highly experienced but are both in their 80s.

There are many reasons to worry about Guru Nanak Auto Axles. However on a positive note, it has a 33% market share, long-standing customer relationships and a budding economic recovery in India to make money from. It is also available cheap, at a PE of about 12.

Who's selling and how much? This is a fresh issue of shares which will dilute existing shareholders (who own 100%). 29.35% of the company is being offloaded.

The company proposes to use about 70% of the money raised in the IPO for plant and machinery and the balance 30% for its working capital.

Here's our risk score based on the tests we have set. A higher positive score denotes a stronger investment case and vice versa.

GNA Axles IPO - Should you subscribe?

 

  1. Are the company's earnings before tax more than ₹50 cr in the last twelve months?
    No, GNA Axle's earnings before tax are only ₹39.31 cr but they grew at an average rate of about 23% in last 5 years.
  2. Will the company be able to scale up its business?
    Yes, GNA Axles has 33% market share in the axles and spindles market in India. It is likely to grow at an industry growth rate of 10-12% over next 5 years according to CRISIL. A significant growth opportunity lies in international markets. Its market share in North America is only 2% and that in Europe is around 5%. Low costs could help GNA gain market share in these geographies. Major international customers include Dana Ltd., Meritor HVS and John Deere.
  3. Does the company have recognizable brand/s, truly valued by its customers?
    Yes, GNA is the largest player in this category in India and deals with a number of auto players.
  4. Does the company have high repeat customer usage?
    Yes, it is a very sticky business. M&M has been the customer since 1995, John Deere for more than a decade.
  5. Does the company have a credible moat?
    No. Whilst the company has long standing customers who face relatively high switching costs, there are no barriers to entry or exit in the industry or any special technology that is specific to GNA Axles.
  6. Is the company sufficiently robust to major regulatory or geopolitical risks?
    Yes, there are no major regulatory or geopolitical risks to the company's business.
  7. Is the business of the company immune from easy replication by new players?
    No, there are no barriers to entry or exit or technological barriers.
  8. Is the company's product able to withstand being easily substituted or outdated?
    Yes, there isn't much technological innovation going in this field and it is an essential part of every car.
  9. Are the customers of the company devoid of significant bargaining power?
    No, top 3 customers contribute 22% to revenue. The company regularly faces pressure from its customers for reducing the price of its products.
  10. Are the suppliers of the company devoid of significant bargaining power?
    Yes, steel is the main raw material consumed by the company which is a highly competitive industry. This keeps a check on supplier bargaining power.
  11. Is the level of competition the company faces relatively low?
    No, although GNA has the largest market share in India, the auto ancillary space remains highly competitive.
  1. Do any of the founders of the company still hold at least a 5 per cent stake in the company? Or do promoters totally hold more than 25 per cent stake in the company?
    Yes, the founders will continue to hold 70.65% of the company.
  2. Do the top three managers have more than 15 years of combined leadership at the company?
    Yes, the promoters of the company who also serve on its board have 23 years of experience in the company.
  3. Is the management trustworthy? Is it transparent in disclosures in consistent with Sebi guidelines?
    Yes, there is nothing in the prospectus or public domain that makes us believe otherwise.
  4. Is the company free of litigation in court or with the regulator that casts doubts on the intention of the management?
    Yes. However the company is facing a winding up petition in Punjab & Haryana High Court in which the petitioner (RMG Alloy Steel Ltd) is alleging non payment of ₹2.169 crores by GNA Axles and ₹5.935 crores by group company GNA Gears.
  5. Is the company's accounting policy stable?
    Yes, company has followed a consistent accounting policy in its filings.
  6. Is the company free of promoter pledging of its shares?
    Yes, there is no promoter pledging.
  1. Did the company generate current and five-year average return on equity of more than 15 per cent and return on capital of more than 18 per cent?
    Yes, it generated an 5 year average return on equity of 18.11% and return on capital employed on 24.78%.
  2. Was the company's cash flow-positive during the previous year and at least four out of the last five years?
    Yes, it was positive in all 5 years.
  3. Did the company increase its revenue by 10 per cent CAGR in the last five years?
    Yes, it grew by 10.57%.
  4. Is the company's debt-to-equity ratio less than 1 or is its interest coverage ratio more than 2?
    Yes, debt-to-equity ratio is 0.94 but it fell below 1 only last year. Interest coverage is now 3.41. GNA Axles repaid ₹28 cr in last 2 years and has to repay another ₹26.73 cr in the current year.
  5. Is the company free from reliance on huge working capital for day to day affairs?
    No, as per company estimates working capital requirements are expected to double from the current level.
  6. Can the company run its business without relying on external funding in the next three years?
    Yes, after the current issue, we do not expect that they will raise further capital from outside.
  7. Have the company's short term borrowings remained stable or declined (not increased by greater than 15%)?
    Yes, they have remained stable with a falling trend.
  1. Does the stock offer operating earnings yield of more than 8 per cent on its enterprise value?
    Yes, at a price band of 205-207, the operating earnings yield is about 12.6%.
  2. Is the stock's price to earnings less than its five or ten year median level?
    At the price band of 205-207, the price to earnings ratio is about 12.
  3. Is the stock's price to book value less than its five or ten year average level?
    The money raised from the IPO will increase the company's book value to about 266 crores from 136 crores at present. Considering this, the company would trade at 1.65 times its new book value.

With inputs from Ashutosh Gupta and Neil Borate.