Automotive Axles Limited — Q3 FY25 earnings call

Call held 10 Feb 2025

Management summary

Automotive Axles reported a strong Q3 FY25 with sequential revenue growth of 7.2% to INR 537 crores and an EBITDA margin expansion to 12%. Despite a projected flat M&HCV market for FY26 and a 5% decline in FY25, the company is focused on new product introductions, market share gains, and operational efficiencies. A capex of INR 300 crores is planned over the next three years for modernization, aiming to double revenue by 2029-2030.

Highlights

  • Total income for Q3 FY25 was INR 537 crores, showing a 7.2% sequential growth from INR 501 crores in Q2 FY25.

  • EBITDA margin improved to 12% in Q3 FY25, up from 11.6% in Q2 FY25 and 11.5% in Q3 FY24.

  • Company is targeting to double its revenue by 2029-2030, implying a 14-16% CAGR, driven by new product introductions and market share gains.

  • INR 72 crores capex has been approved out of a planned INR 300 crores over the next 3 years, focused on modernization and automation.

  • Successful ramp-up of MS 185 axle with a customer and planned launch of bus sector products (MS 177, 13.5m/15m buses) by Q1 next fiscal year.

Concerns

  • M&HCV market is expected to be down by about 5% for FY25 compared to last year, with vehicle volume around 400,000-403,000 units.

  • The overall market for FY26 (April 2025 to March 2026) is expected to be flat.

  • Launch of 9-meter bus axles, initially planned for October 2024, has been shifted to end of calendar year 2025 or early 2026 due to extended validation and regulatory changes.

Key financials

  1. Total Income ₹537 Cr -1.6%YoY
  2. EBITDA Margin 12% +0.5%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 ₹300 Cr
    • Modernizing and automating existing facilities ₹200 Cr
    • Cost optimization, efficiency, lean manufacturing, Industry 4.0
    Nagaraja Gargeshwari: "we are looking at initially next 3 years, as I mentioned, INR300 crores and of which about INR72 crores is already approved." and Saket Kapoor: "we have a capex of INR200 crores to INR300 crores, but that was mainly for the modernizing and the automating of the existing facilities."

Guidance & targets

Revenue

  • Revenue doubling Revenue · by 2029-2030 · High confidence Double revenue
    So, in a long-term perspective, '29-2030, with the projected market volume, we are expecting a doubling of our revenue. That is the strategy that we have laid out and presented to the Board in the previous Board meeting as well.

    — Kishan Kumar

  • Revenue CAGR for doubling Revenue · next 5 years · High confidence 14-16%
    So one is a straight math. On an average, we need to do a CAGR of about anywhere between 14% to 16% if we have to double the growth, right?

    — Nagaraja Gargeshwari

EBITDA Margin

  • EBITDA Margin EBITDA Margin · future · Medium confidence beyond 13-13.5%
    So, even the current volumes, the volumes bless us, we will be definitely able to take it up even beyond 13%, 13.5%.

    — Nagaraja Gargeshwari

  • EBITDA Margin improvement EBITDA Margin · next 3 to 4 years · Medium confidence 15-20% improvement from current level
    definitely will yield a bit -- will yield us some improvement, not less than about 15% to 20% at the current level overall in the next 3 to 4 years.

    — Nagaraja Gargeshwari

  • EBITDA Margin upside EBITDA Margin · future · Medium confidence 1-2% upside
    we'll be able to maintain and then slightly improve upon like what Ranga mentioned, probably another 1% to 2% upside is available there.

    — Nagaraja Gargeshwari

Capex

  • Capex as % of revenue Capex · year-on-year · Medium confidence 1-1.5% to 3%
    our capex is probably going to increase year-on-year for sustenance probably from the current level of 1%, 1.5% to anywhere near 3% because as we start talking about efficiency, lean manufacturing, automation and then Industry 4.0, so our capex, there will be an uptick in the capex in terms of percentage, which should help us to modernize the plant.

    — Nagaraja Gargeshwari

Capacity

  • Axle capacity level Capacity · in a year, 1.5 years' time · Medium confidence 15,000 to 16,000 units
    So, if you really look at it, we are aspiring to reach to the 15,000 to 16,000 capacity level maybe in a year, 1.5 years' time.

    — Ranganathan S.

What to watch in Q4 FY25

9-meter bus axle product launch

Next quarter / End CY25
Current Extended validation, trials expected by May 2025
Target First few vehicles on field trials, SOP by end CY25/early CY26

Why it matters

This is a key new product for market diversification and revenue growth in the bus segment.

Kishan Kumar: "Now the validation as we speak is progressing. And May, maybe even before May, we should be having the first few vehicles on the field trials with customers." and "Launch SOP will be around the end of calendar year this year or early next year because the homologation and then some other changes, the regulation changes -- regulatory changes in terms of noise that is not yet finalized."

Risks & concerns

  • M&HCV market slowdown

    medium

    M&HCV market expected to be down by 5% in FY25 and flat in FY26, impacting overall volumes.

    Management acknowledged

  • Delay in new product launches (bus axles)

    medium

    9-meter bus axle launch shifted from Oct 2024 to end CY25/early CY26 due to extended validation and regulatory changes.

    Management acknowledged

  • High customer concentration

    medium

    Ashok Leyland continues to be a major customer, prompting diversification efforts into exports and aftermarket.

    Analyst acknowledged

  • Geopolitical tensions impacting growth

    low

    Management currently sees no significant impact or risk from geopolitical tensions on growth.

    Analyst downplayed

Q&A highlights

5 direct
Impact of Bharat Forge's acquisition of American Axle on Automotive Axles Partial
So broadly, by and large, we don't have much clarity at this moment of time. But nevertheless, we don't anticipate a much of impact to us.

Analyst sought clarity on potential competitive or strategic shifts due to a major industry acquisition, which management downplayed as having minimal impact.

Asked by Natraj Shankar

Rationale for Hosur plant closure and financial impact Direct
Technically, there was a plant. It was the license was given as a plant. So, we are closing the plant license and that is how we have given that explanation. So materially, there is no impact for us and it is better because now we are closer to customer.

Analyst questioned the closure of a plant contributing 20% of revenue; management clarified it was a technical closure of a leased VMI warehouse, with no material financial impact.

Asked by Saket Kapoor

Progress on Mission 25 agenda and growth drivers Direct
So, very happy to share with you that we have been able to accomplish all of them, what we laid out during 2022, because we have always put a 3-year strategy. So, we have been able to accomplish each one of them.

Analyst inquired about the status of strategic initiatives; management confirmed successful execution and outlined future growth drivers including market growth, share improvement, exports, and aftermarket.

Asked by Saket Kapoor

Current capacity utilization and optimum levels Direct
As you rightly said today, if you ask me a capacity utilization, roughly, I'll say about 68% to 70% level, 65% to 68% level, I could say that.

Analyst sought clarity on operational efficiency; management provided current utilization levels and discussed the dynamic nature of capacity due to new product introductions.

Asked by Saket Kapoor

Delay in 9-meter bus axle launch and competitive positioning Direct
this is why the extended validation and some of the changes in the process specific to the gear noise has taken a little bit more time. But we are very confident. Now the validation as we speak is progressing. And May, maybe even before May, we should be having the first few vehicles on the field trials with customers.

Analyst questioned the delay of a key product launch; management explained the reasons (validation, regulatory changes) and reaffirmed confidence in a near-term launch, also highlighting competitive strategy.

Asked by Gargi Singh

Related party transactions with Meritor HVS and potential subsuming of the entity Partial
I don't know, that's not on the cards at this moment of time. So, the status quo remains same. 2 entities will exist because consciously, I think we have explained it in our postal ballot notice also further clarification also we have given because the value addition what Meritor who owns a brand and IP is quite enormous.

Analyst probed a sensitive topic regarding related party transactions and the future structure of Meritor HVS, which management stated would remain separate for now, citing value addition.

Asked by Shashank Kanodia

Customer concentration and diversification strategy Direct
So, the first strategy that we are putting in place and focus is on diversifying in terms of reducing our risk of domestic market cyclicality. And that is where all the modernization, quality improvements with that, what we want to establish is a better export opportunity within the family of companies in North America and Europe.

Analyst raised concerns about high customer concentration (Ashok Leyland); management outlined a strategy to diversify through exports and focus on independent aftermarket to mitigate this risk.

Asked by Saket Kapoor

Margin profile of e-bus axles compared to normal axles Partial
Margin from a technology standpoint and the content we have, the value definitely is high, but margin depends on many things, right, what we are competing with, what we are comparing with? Is it central drive powertrain system or anything else. So, it's very hard to say right now.

Analyst inquired about the profitability of new e-bus axle products; management indicated high value but deferred specific margin commentary due to nascent market and competitive factors.

Asked by Shubham Bhatra

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Detailed narrative

Q3 FY25 Financial Performance and Market Context

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.

Strategic Growth Drivers and Revenue Doubling Target

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.

Product Development and Diversification

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.

Capital Expenditure and Operational Efficiency

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%.

Related Party Transactions and Corporate Structure

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.

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