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B. Krishnakumar

INVESTORS can consider exposure in Automotive Axles at the prevailing price levels. Taking into account the capacity expansion projects implemented by the company and the growth potential in the domestic and export markets, the performance is likely to improve.

Automotive Axles is among the major producers of drive axle assemblies for commercial vehicles. It caters to automobile majors such as Tata Motors and Ashok Leyland. Given the nature of the product, the bulk of the revenue flows from the original equipment market.

Helped by the sharp growth in commercial vehicles production, the company reported improved performance in the recent quarters.

For the three months ended March 2005, the turnover rose 35 per cent to Rs 88.5 crore and post-tax earnings 65 per cent to Rs 10.6 crore.

The company is likely to sustain the growth rates if the recent developments are any indication.

Automotive Axles is likely to commence supplies to other commercial vehicle majors such as Eicher and Swaraj Mazda this fiscal.

Export earnings are also likely to grow with enhanced supplies to the US-based Meritor. The American company has identified Automotive Axles as a sourcing base for its global requirements.

Though exports accounted for only 3 per cent of the turnover the pervious fiscal, the recent initiatives would lead to a significant jump in export earnings.

To capitalise on the growth potential, the company is scaling up its capacity. Expanded capacity is likely to be in place by the end of this calendar year.

On the flip side, the firm trend in the price of steel is a cause for concern. This would inflate the input cost and affect profitability in the process.

The company has managed to negotiate price hikes with its customers. This has helped Automotive Axles post a higher profitability for the quarter ended March 2005, despite the firm trend in input costs.

Considering that the company caters to the original equipment market, the scope for frequent revision in prices would be limited.

In this context, the company's profitability would be under pressure if steel prices were to settle at higher levels.

From the demand side, a slowdown in commercial vehicle production would affect Automotive Axles' performance.

Besides, the company is likely to start supplies to new customers this fiscal; this would be a key driver of earnings.

Given this context, Automotive Axles' performance is likely to improve. The `buy' recommendation is on the premise that the commercial vehicle production would remain robust. Signs of a slowdown would warrant dilution of equity holdings.

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