Automotive Axles Limited — Q1 FY26 earnings call

Call held 7 Aug 2025

Management summary

Automotive Axles reported a stable Q1 FY26 revenue of INR498 crores, with notable improvements in EBITDA and PAT margins to 11.7% and 7.3% respectively, despite a soft market. The company highlighted strong working capital and cash flow, driven by new product development, cost reduction, and automation. However, Q2 is expected to be weaker due to inventory build-up by OEMs and monsoon effects, with export revenue recognition normalizing from Q2.

Highlights

  • EBITDA margin improved by 0.5% to 11.7% in Q1 FY26, compared to 11.2% in Q1 FY25.

  • PAT margin improved by 0.4-0.5% to 7.3% in Q1 FY26, compared to 6.9% in Q1 FY25.

  • Strong working capital performance and good cash flow for the quarter.

  • New product development for 13.5 and 15-meter bus segments are in proto batches and will go into production soon.

  • Ongoing cost reduction and automation programs are contributing to improved productivity and efficiency.

Concerns

  • The market is currently soft, with Q2 FY26 expected to be lower than anticipated.

  • Q2 will be impacted by OEMs building inventory due to AC cabin changeover and an early, above-average monsoon affecting freight movement.

  • Export revenue recognition was delayed in Q1 FY26 due to Incoterms, impacting reported top-line.

Key financials

  1. Revenue ₹498 Cr 0%YoY
  2. EBITDA Margin 11.7% +0.5%YoY
  3. PAT Margin 7.3% +0.4%YoY

What they filed

Q1 FY27: revenue up 5.7%, net profit up 27.8% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue495 531 560 489 462 −7%562 +6%664 +19%517 +6%
EBITDA51 57 63 48 48 −6%64 +12%77 +22%60 +25%
Net profit36 40 46 36 36 +0%39 −2%54 +17%46 +28%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Capital allocation

high confidence
  • Capex ₹120 Cr
    • Capacity capability and enhancement projects
    • Equipment replacement
    • Automation
    The Board has already approved about INR120 crores that we are spending on the capex, including our capacity capability and then equipment replacement and also automation. So all those projects put together. So what we see is... This year and next year put together, mainly on the specific capacity enhancement -- capacity and capability enhancement projects. This is other than sustenance capex.

Guidance & targets

Profitability

  • EBITDA Margin Profitability · ongoing · Medium confidence marginal improvement
    there will be an improvement in the EBITDA margin, okay? I can't say a number at this moment of time.

    — Nagaraja Gargeshwari

Product Development

  • New Bus Segment Product Commercialization (13.5/15-meter) Product Development · Q2 FY26 · High confidence close commercials in Q2 FY26
    we have finalized the specification and design and we are hoping to close the commercials first in this quarter, which is the Q2 of this year.

    — Kishan Kumar

  • New Bus Segment Product Trials Completion Product Development · Q2-Q3 FY26 · High confidence complete in Q2 and early Q3 FY26
    tweaking required as we expect after the trials, which also we are planning to complete in the Q2 and early Q3 of this year.

    — Kishan Kumar

  • New Product Launch (Prototypes) Product Development · H2 FY26 · High confidence ready by end of second half
    Yes. Towards the end of second half. We are kind of looking at this point of time, we are kind of fine-tuning the product specification to meet the ever-changing customer applications and demands. So we'll be having a properly prototype ready by end of this year.

    — Nagaraja Gargeshwari

Revenue

  • Export Revenue Recognition Revenue · Q2 FY26 onwards · High confidence normalize from Q2 onwards
    going forward from the Q2 onwards, it will get normalized.

    — Nagaraja Gargeshwari

Financials

  • Overall Financial Normalcy Financials · Q3 FY26 onwards · Medium confidence reasonable normalcy
    Maybe Q3 onwards, you can see a reasonable normalcy in the overall financials.

    — Sankaran Ranganathan

Capex

  • Phase 1 Capex Completion Capex · FY26 · High confidence by end of this financial year
    The Phase 1, we will be completing it by end of this financial year.

    — Nagaraja Gargeshwari

  • Phase 1a Capex Completion Capex · Q3 FY27 · High confidence by December 2026 (Q3 FY27)
    And then coming to the Phase 1a, we should be able to complete those upgrades and investment and commission all the equipments by December 2026. So that's third quarter of 2027.

    — Nagaraja Gargeshwari

Exports

  • Export Growth Exports · next couple of years · Low confidence potential increase
    So we are expecting there will be a potential increase in our export to these regions in next couple of years.

    — Nagaraja Gargeshwari

What to watch in Q2 FY26

Quantification of service fee paid to Meritor

Q3 FY26
Current Not quantified, grouped under 'other expenses'
Target Specific amount or percentage disclosed

Why it matters

This will clarify the financial impact of the new business model and the true margin improvement.

No, no, that's what I said, hold it for a couple of quarters. At this moment of time, I'm not -- I said the percentage is based on the sales what we made to the domestic OEs. And hold your question for the next couple of quarters, my request is that.

Risks & concerns

  • OEM inventory build-up due to AC cabin changeover

    high

    OEMs built surplus inventory for AC cabin changeover, impacting Q2 sales.

    Management acknowledged

  • Early and above-average monsoon

    high

    Monsoon impacting freight movement, contributing to lower Q2 expectations.

    Management acknowledged

  • Soft market demand

    medium

    The market is currently soft, impacting demand.

    Management acknowledged

  • Uncertainty regarding new business model benefits

    medium

    Analysts expressed ambiguity about the extent of value addition and margin improvement flowing to the listed entity from the new arrangement.

    Analyst acknowledged

  • Tariff discussions in North America

    low

    Tariff discussions are contributing to low end markets in North America, though direct impact on AAL is small.

    Management acknowledged

Q&A highlights

4 direct, 1 evasive
Impact of new business model on topline and EBITDA, and service fee structure Partial
In terms of revenue, earlier also we are operating with very strong operating the transfer pricing as to the arm's length. The improvement on the revenue may not be very significant in terms of the top line and it is less than the double digit in terms of the increase on the top line. ... In terms of the overall profitability, your question is you can see the effect for the full year because the first quarter since we have -- there are two factors I just want to bring about. The revenue recognition is one of the factors which will affect especially for the export this year this quarter and that will get normalized in the coming quarter.

Analysts sought clarity on the financial impact of the new business model and service fee, which management indicated would result in single-digit topline growth and marginal EBITDA improvement, with full effects visible later.

Asked by Viraj from SiMPL

Meritor HVS margins, related party transactions, and benefit to AAL's EBITDA Partial
You're putting very aggressive statement. See, what I'm saying is I very clearly mentioned there will be a marginal improvement on the EBITDA, okay? So... That's what I said. This arrangement is done on an arm's length. So there will be -- because of the model change, there will be an improvement in the EBITDA margin, okay? I can't say a number at this moment of time. We're also going through this.

Analyst challenged management on the perceived lack of significant EBITDA benefit from consolidating Meritor HVS sales, suggesting a larger potential upside, which management attributed to arm's length assessment and marginal improvement.

Asked by Gaurav Agrawal from Nine One Capital

Update on new products for the bus segment (13.5, 15, and 9-meter) Direct
So I'll start with the 13.5 and 15 meters. So these 2 are already supplying in proto batches and we'll be going into production soon, which is as per our plan. And coming to the other one, which is the we have discussed in the past, the new development, the business discussions and commercials are going on with the customer. So we have finalized the specification and design and we are hoping to close the commercials first in this quarter, which is the Q2 of this year.

Management provided specific timelines and progress updates on new product launches for the bus segment, indicating commercialization and trial completion in the near future.

Asked by Viraj from SiMPL

Initiatives to add non-Meritor customers in the export market Partial
We always supply to our own entities elsewhere. And we don't typically do a direct sales because the application, the business model and the legal requirements are very different in the regions. Volvo or currently UD, that is a different case because that is a division that is sitting in India and the discussions and the techno commercial closes here. It's only a supply that goes to the other plant outside India.

Management clarified their export strategy, emphasizing supply to group entities due to regional complexities, rather than direct sales to external OEMs, indicating a specific approach to international markets.

Asked by Radha

Overall outlook for FY26, demand softening, and market recovery Direct
But what we do see is a couple of things which may be only temporary. The Q1 due to this AC cabin change, most OEMs have built on their inventory, I think in surplus of what they usually plan for. So that is going to impact us in Q2. And then the second one is monsoon. Typically, we see that when there is a good monsoon, the freight movement is low. And this year looks like it's above average monsoon and also it started a little bit early in the country. So both these will -- probably the Q2 will be much lower than what we initially anticipated. But we do think that Q3, Q4, that's where we start seeing the other programs that the government is doing, for example, infra, the industrial activities are very low, even though there's so many infra programs launched, but those will start kicking in after the monsoon. Hopefully, Q3 and Q4, we will see the market coming back we are very optimistic that it will be at that INR400 crores or plus/minus 3%, 4% level.

Management provided a detailed market outlook, forecasting a weaker Q2 due to specific headwinds but anticipating a recovery in Q3/Q4, with the overall market volume remaining stable.

Asked by Purva Jhaveri from One Up Financial

Quantification of service fee paid to Meritor under 'other expenses' Evasive
At this moment, I don't have the detail with me, but it is grouped under the other expenses at this moment of time. ... No, no, that's what I said, hold it for a couple of quarters. At this moment of time, I'm not -- I said the percentage is based on the sales what we made to the domestic OEs. And hold your question for the next couple of quarters, my request is that.

Management deferred quantifying the service fee paid to Meritor, stating it would be clearer in Q3, which leaves uncertainty regarding the exact financial impact of the new model.

Asked by Purva Jhaveri from One Up Financial

Reasons for not consolidating exports in Q1 and whether related expenses were incurred Direct
No, no. Export is being made from Automotive Axles. Only these Incoterms for all these exports are different. So based on the Incoterms, we are not able to recognize the revenue in the books. And as we meet the Incoterms, the revenue will be recognized from this quarter onwards, that is Q2 onwards, the revenue will be recognized as per the revenue recognition policy. ... The revenue is not recognized. Automatically, the COGS relevant to the export is also not recognized. So it goes hand in hand.

Management clarified that the lack of export revenue recognition in Q1 was a timing issue due to Incoterms, which will normalize from Q2, and that associated costs were also not recognized.

Asked by Viraj from SiMPL

Competition from American Axles (Bharat Forge) and potential pricing pressure Direct
No, I don't think so because, in fact, we also supply some brakes to American Axles for another OE through the American Axles. So essentially, what we see is American Axles and as we continue to be competitors. We continue to compete for the share of business. That has been happening for the last several years, if I'm right, at least for the last 10 years. I think it will continue to happen.

Management stated that they have not experienced pricing pressure from American Axles and continue to compete effectively, indicating stability in their competitive landscape.

Asked by Samarth from Janak Merchant Securities

2 min read 6 chapters

Detailed narrative

Q1 FY26 Performance Overview

Automotive Axles Limited reported a Q1 FY26 revenue of approximately INR498 crores, maintaining a similar level to the previous year. Despite a soft market, the company achieved an EBITDA margin of 11.7%, an improvement of 0.5% from 11.2% in Q1 FY25. The PAT margin also saw an increase, reaching 7.3% in Q1 FY26 compared to 6.9% in the prior year, reflecting a 0.4-0.5% improvement. Management highlighted strong working capital performance and healthy cash flow generation during the quarter.

New Business Model and Profitability Impact

The company has transitioned to a new business model, consolidating sales previously routed through Meritor HVS (India) Limited. Management expects a 'single digit' increase in top-line revenue and a 'marginal improvement' in EBITDA margins due to this change. They emphasized that the arrangement, including the service fee paid to Meritor for marketing, product development, and engineering support, is based on arm's length assessment. The full impact on profitability is expected to become clearer from Q3 FY26 onwards.

Bus Segment Product Development and Commercialization

Automotive Axles is actively addressing product gaps in the bus segment. The 13.5-meter and 15-meter axle products are currently in proto batches and are slated to go into production soon. For other new developments, commercial discussions are ongoing, with the company aiming to finalize commercials in Q2 FY26. Additionally, required tweaking after trials for some products is planned for completion in Q2 and early Q3 FY26, indicating a focused effort on expanding their product portfolio in this segment.

Market Outlook and Q2 Headwinds

The market is currently soft, and Q2 FY26 is anticipated to be lower than initially expected. This is attributed to two primary factors: OEMs building surplus inventory due to the AC cabin changeover, which will subside, and an early, above-average monsoon impacting freight movement. However, management remains optimistic for Q3 and Q4, expecting the market to recover to approximately INR400 crores, plus/minus 3-4%, driven by government infrastructure and industrial activities post-monsoon.

Export Strategy and Revenue Recognition

In Q1 FY26, export revenue recognition was impacted by Incoterms, leading to a delay in booking revenue, although associated costs were also not recognized. Management stated that export revenue recognition would normalize from Q2 FY26 onwards. The company's export strategy primarily involves supplying to its own group entities in other regions, which then interface with end customers, due to varying application, technical, and legal requirements across geographies. A potential increase in exports to these regions is expected in the next couple of years.

Capital Expenditure Plans and Automation

The Board has approved approximately INR120 crores for capital expenditure, covering capacity capability and enhancement projects, equipment replacement, and automation. This investment is spread across FY26 and FY27. Phase 1 of these projects is expected to be completed by the end of FY26, with benefits accruing from Q1 FY27. Phase 1a, involving further upgrades and investments, is targeted for completion by December 2026 (Q3 FY27). These investments aim to improve productivity, efficiency, and prepare the company for future market upside.

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