Automotive Axles

Automotive Axles reported a total income of INR 537 crores for Q3 FY25, marking a 7.2% sequential growth from INR 501 crores in Q2 FY25. However, this was a slight decline of 1.6% compared to the same quarter last year. The company successfully expanded its EBITDA margin to 12% in Q3 FY25, up from 11.6% in the previous quarter and 11.5% year-on-year, attributed to cost optimization initiatives despite a soft market. Management noted the M&HCV market is expected to be down by approximately 5% for FY25, with vehicle volumes around 400,000-403,000 units, and anticipates a flat market for FY26.

The company has set an ambitious target to double its revenue by 2029-2030, which translates to a required CAGR of 14-16%. This growth will be driven by several factors: organic market growth (projecting 500,000 M&HCV units by 2030), improving market share through new product launches, expanding export markets, and strengthening the aftermarket business. New heavy-duty axles like MT 160 and MS 610 are expected to increase value realization per axle by about 20% for typical applications, contributing significantly to revenue growth.

Automotive Axles is actively pursuing product diversification, particularly in the bus segment and heavy-duty axles. The launch of 9-meter bus axles, initially targeted for October 2024, has been rescheduled to end of calendar year 2025 or early 2026 due to extended validation and regulatory changes related to gear noise. Additionally, the company is developing MS 177 axles for 13.5-meter and 15-meter buses, with trials expected to begin by May 2025. The strategy also includes focusing on EV segments, especially for buses, where Meritor is expected to provide full end-to-end solutions including front axles.

The company plans a capital expenditure of INR 300 crores over the next three years, with INR 72 crores already approved. This investment is primarily for modernizing and automating existing facilities, enhancing efficiency, and implementing Industry 4.0 initiatives. Management expects capex as a percentage of revenue to increase from the current 1-1.5% to around 3%. These investments are aimed at improving throughput time, lean manufacturing, and overall quality, which are expected to yield a 15-20% improvement in margins over the next 3-4 years, potentially reaching beyond 13-13.5%.

Following concerns raised by minority shareholders regarding related party transactions with Meritor HVS India Private Limited, management confirmed that they are working on a model to address the shareholders' mandate. They expect to finalize the operational model by the first or second week of March, ensuring it is operational from April 1st. Management clarified that the two entities (Automotive Axles and Meritor HVS) will continue to exist separately, citing the significant value addition from Meritor's brand and IP, and that subsuming Meritor HVS into Automotive Axles is not currently on the cards.