2QSY2013 Result Update | Auto Ancillary

May 3, 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) (44.8) (68.1) (524)bp (86.9) 1QSY13 198 18 9.3 6 % chg (qoq) (17.9) (36.1) (206)bp (58.6)

`270 -

2QSY13 163 12 7.2 3

2QSY12 295 37 12.4 19

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

Auto Ancillary 408 94 0.4 560/269 2,422 10.0 19,576 5,944 ATOA.BO ATXL@IN

Automotive Axles (ATXL) posted extremely weak results for 2QSY2013. Continued slowdown in the medium and heavy commercial vehicle (MHCV) industry impacted the companys sales and further, its operating margins. We expect the growth outlook for the MHCV industry, which is the key driver of ATXLs revenues, to remain challenging for 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. Weak operating performance: In 2QSY2013, ATXLs top-line declined by 44.8% yoy (17.9% qoq) following a 33.8% yoy decline in the MHCV industry volume, which is the primary source of revenue for the company. The operating margins deteriorated to 7.2% (down 524bp yoy and 206bp qoq) primarily due to drop in the utilization levels, which resulted in a 320bp (70bp qoq) and 190bp yoy (flat qoq) increase in employee and other expenditure as a percentage of sales, respectively. Consequently the operating profit and net profit fell sharply by 68.1% (36.1% qoq) and 86.9% yoy (58.6% qoq) to `12cr and `3cr respectively. Outlook and valuation: We believe the near term operating environment will remain challenging for the company as the MHCV segment is witnessing a significant slowdown. However, the expected easing of interest rates will revive MHCV demand in SY2014, leading to a revival in the companys performance. At `270, the stock is trading 10x SY2014E earnings. We believe that the current valuation mostly captures the expected revival in earnings growth in SY2014. We therefore 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 20.3 0.4 8.3

Abs. (%) Sensex Automotive Axles

3m (1.0)

1yr 14.1

3yr 12.6

(23.2) (48.0) (34.6)

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 7.1 1.7 25.7 31.4 0.4 3.8

SY2012 941 (7.1) 45 (21.8) 10.8 29.8 9.0 1.5 17.5 23.3 0.5 4.4

SY2013E 834 (11.3) 26 (42.0) 9.3 17.3 15.6 1.5 9.5 13.3 0.6 6.0

SY2014E 965 15.7 41 56.6 10.6 27.1 10.0 1.3 14.0 17.9 0.5 4.5

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

Please refer to important disclosures at the end of this report

Automotive Axles | 2QSY2013 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

2QSY13 163 117 71.5 14 8.3 21 12.9 151 12 7.2 2 7 1 3 3 2.0 1 22.9 3 1.5 15.1 1.7

2QSY12 295 212 71.6 15 5.1 32 10.8 259 37 12.4 3 7 2 29 29 9.7 9 33.0 19 6.5 15.1 12.7

% chg (yoy) (44.8) (44.9) (10.3) (33.9) (41.5) (68.1) (15.9) (3.7) (70) (88.6) (88.6) (92.1) (86.9)

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

% chg (qoq) (17.9) (16.2) (10.5) (18.2) (16.0) (36.1) 26.6 (14.5) 65 (64.0) (64.0) (75.0) (58.6)

1HSY13 361 256 70.7 29 8.0 47 13.0 331 30 8.3 4 14 1 12 12 3.4 4 30.3 9 2.4 15.1

1HSY12 588 420 71.4 30 5.0 65 11.0 514 74 12.6 5 13 2 57 57 9.8 18 32.2 39 6.6 15.1 25.8

% chg (yoy) (38.5) (39.1) (2.6) (27.7) (35.5) (59.2) (17.8) 9.4 (56.6) (78.5) (78.5) (79.8) (78.0)

(86.9)

4.0

(58.6)

5.7

(77.9)

Top-line down by a significant 44.8% yoy: For 2QSY2013, the top-line declined by 44.8% yoy (17.9% qoq) following a 33.8% yoy decline in MHCV industry volumes, which is the primary source of revenue for the company. The MHCV volumes of ATXLs key clients, Tata Motors and Ashok Leyland registered a decline of ~43% and ~19% yoy during the quarter.

Exhibit 2: MHCV sales down 33.8% yoy...

(units) 120,000 100,000 80,000 60,000
106,581 112,739
(12.8) (14.4) (31.6) (33.8) 13.0 6.5 6.5

Exhibit 3: ... leading to a 44.8% yoy decline in top-line

(%) 20.0 ( ` cr) 350 300 250 200 150 100
278 274 281 293 295

MHCV volume
11.7 5.8

yoy change (RHS)

63.3 39.6

Net sales 68.3 63.0

yoy growth (RHS)

(%) 80.0 60.0 40.0

10.0 0.0 (10.0) (20.0) (30.0) (40.0)

6.2

20.0 0.0 (33.6)

182

40,000 20,000 0

81,791

92,901

90,280

71,335

79,536

61,781

74,630

(39.4)
170

(32.2) (44.8)
198 163

(20.0) (40.0) (60.0)

50 0

2QSY11

3QSY11

4QSY11

1QSY12

2QSY12

3QSY12

4QSY12

1QSY13

2QSY11

3QSY11

4QSY11

1QSY12

2QSY12

3QSY12

4QSY12

1QSY13

Source: Company, Angel Research

2QSY13

Source: Company, Angel Research

May 3, 2013

2QSY13

Automotive Axles | 2QSY2013 Result Update

Operating margins down 524bp yoy: The operating margins deteriorated to 7.2% (down 524bp yoy and 206bp qoq) primarily due to a drop in the utilization levels which resulted in a 320bp (70bp qoq) and a 190bp yoy (flat qoq) increase in employee and other expenditure as a percentage of sales respectively. Consequently the operating profit and net profit fell sharply by 68.1% (36.1% qoq) and 86.9% yoy (58.6% qoq) to `12cr and `3cr respectively.

Exhibit 4: EBITDA margin trend

(%) 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 12.5 12.5 9.0 12.7 12.4 9.9 5.2 9.3 7.2 71.9 70.0 74.9 71.1 71.6 75.3 68.3 70.1 71.5 EBITDA margin Raw material cost/sales

Exhibit 5: Net profit down to `3cr

( ` cr) 25 20 15 10 1.5 5 0
18 18 12 20 19 6

Net profit 6.6 6.5 6.7 6.5

Net profit margin (RHS)

(%) 8.0 7.0 6.0 5.0

4.1 3.3 3.1

4.0 3.0 2.0 1.0

3

0.1

0.0

2QSY11

3QSY11

4QSY11

1QSY12

2QSY12

3QSY12

4QSY12

1QSY13

2QSY13

2QSY11

3QSY11

4QSY11

1QSY12

2QSY12

3QSY12

4QSY12

1QSY13

Source: Company, Angel Research

Source: Company, Angel Research

May 3, 2013

2QSY13

Automotive Axles | 2QSY2013 Result Update

Investment arguments
Slowdown in MHCV segment to restrict top-line growth: ATXL derives ~95% of its revenue from the MHCV segment, which is witnessing sluggish growth in recent times due to relatively high interest rates and slowdown in industrial activity. Lower utilization levels to impact operating margins: Due to declining sales in the MHCV industry, the companys utilization levels have dropped significantly. As a result of lower utilization levels, the benefits of operating leverage have reduced and the same will impact EBITDA margins going ahead. As a result, we expect operating margins to decline 150bp in SY2013. However, an expected pick-up in volumes in SY2014E is expected to improve utilization levels, which will aid EBITDA margin expansion in SY2014.

Outlook and valuation

We expect the growth outlook for the MHCV industry, 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, thus enabling a revival in ATXLs performance. At `270, the stock is trading 10x SY2014E earnings. We believe that the current valuation mostly captures the expected revival in earnings growth in SY2014. We therefore 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 assemblies Axle Housing Others
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 64 924 653 185 23 64 1,070 729 238 28 74

May 3, 2013

Automotive Axles | 2QSY2013 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

Aug-05

Aug-06

Jun-09

Apr-12

Oct-03

Sep-04

May-10

May-11

Apr-13

Jul-07

Jul-08

Jan-08

Apr-07

Apr-10

Jan-11

Oct-05

Oct-08

Oct-11

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
# ^

Reco. Buy Neutral Neutral Neutral Accumulate Neutral Buy Accumulate

CMP (`) 261 270 229 8,892 136 1,422 190 26

Tgt. price (`) 326 150 222 30

#

Upside (%) 25.0 10.2 16.6 14.2

P/E (x) FY13E FY14E 13.2 15.6 15.8 23.8 17.4 16.1 15.2 4.8
^

EV/EBITDA (x) FY13E 8.6 6.0 6.6 14.9 9.5 9.5 7.1 3.7 FY14E 7.6 4.5 5.7 12.3 7.9 7.3 6.1 3.1 12.0 10.0 13.2 20.3 14.9 13.0 12.9 3.5

RoE (%) FY13E 27.1 9.5 13.6 18.0 18.1 15.5 27.5 11.1 FY14E 23.7 14.0 14.7 17.9 18.2 16.5 25.8 13.7

FY12-14E EPS CAGR (%) 8.4 (4.7) 18.6 19.9 21.8 6.9 23.0 49.0

Exide Industries FAG Bearings# Motherson Sumi* Subros

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.

May 3, 2013

Apr-13

Jul-06

Jul-09

Jul-12

Automotive Axles | 2QSY2013 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 834 (11.3) 757 590 78 20 69 77 (24.2) 9.3 31 46 (38.1) 5.5 10 3 38 (42) 0 38 12 32.0 26 26 (42.0) 3.1 17.3 17.3 (42.0) SY14E 965 15.7 863 681 84 23 76 102 32.0 10.6 35 67 45.8 7.0 10 4 60 57 0 60 19 32.0 41 41 56.6 4.2 27.1 27.1 56.6

May 3, 2013

Automotive Axles | 2QSY2013 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 276 131 145 7 146 9 11 127 64 82 234 281 149 133 8 234 9 11 214 87 147 288 317 171 146 4 13 327 11 15 301 184 143 306 361 185 176 19 12 1 288 2 32 253 163 124 331 409 216 193 20 12 1 290 14 30 246 151 139 364 456 251 205 23 12 1 338 19 34 285 190 147 387 15 160 175 45 14 234 15 189 204 71 14 288 15 229 244 49 12 1 306 15 256 271 45 12 2 331 15 265 280 70 12 2 364 15 288 303 70 12 2 387 SY09 SY10 SY11 SY12 SY13E SY14E

May 3, 2013

Automotive Axles | 2QSY2013 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 38 31 (3) (3) (12) 52 (50) 3 (47) 25 18 7 11 2 14 SY14E 60 35 (3) (4) (19) 69 (50) 4 (46) 18 (18) 5 14 19

May 3, 2013

Automotive Axles | 2QSY2013 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 0.7 4.5 0.2 0.5 6.4 1.0 101 91 96 97 2.4 41 52 33 58 3.4 36 57 41 49 2.8 40 68 59 49 2.2 40 68 59 54 2.2 40 68 56 48 5.5 6.0 5.6 25.1 23.5 23.3 31.4 31.6 25.7 23.3 22.6 17.5 13.3 13.1 9.5 17.9 18.2 14.0 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 5.5 0.7 2.5 9.2 12.0 0.2 8.7 7.0 0.7 2.7 12.7 10.2 0.2 13.2 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 17.3 17.3 37.9 10.0 185.1 27.1 27.1 50.0 10.0 200.5 42.2 14.5 2.3 1.0 1.7 13.9 1.9 9.3 6.3 2.0 3.1 0.7 5.4 1.6 7.1 5.0 1.7 3.7 0.4 3.8 1.5 9.0 5.6 1.5 3.7 0.5 4.4 1.4 15.6 7.1 1.5 3.7 0.6 6.0 1.3 10.0 5.4 1.3 3.7 0.5 4.5 1.2 SY09 SY10 SY11 SY12 SY13E SY14E

May 3, 2013

Automotive Axles | 2QSY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
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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%)

May 3, 2013

10