ATUL AUTO LIMITED : GEARING UP AHEAD !!!

*Atul Auto quotes ex-split basis from September 12, 2014. Company declared split in face value of its shares from Rs. 10 to Rs. 5.00 .

                                                            
Scrip Code: 531795 / ATULAUTO

CMP:  Rs. 649.50; Buy at current levels and on declines.
Short Term Target: Rs. 700; Medium to Long term Target: Rs. 800; STOP LOSS – Rs. 597.55; Market Cap: Rs. 712.60 Cr; 52 Week High/Low: Rs. 687.90 / Rs. 143.15

Total Shares: 1,09,71,600 shares; Promoters : 60,42,405 shares –55.07 %; Total Public holding : 49,29,195 shares – 44.93 %; Book Value: Rs. 83.52; Face Value: Rs. 10.00; EPS: Rs. 31.05; Dividend: 75.00 % ; P/E: 20.091 times; Ind. P/E: 21.53; EV/EBITDA: 12.28.

Total Debt: ZERO Cr; Enterprise Value: Rs. 682.29 Cr.

ATUL AUTO LIMITED:  ATUL AUTO Ltd was incorporated in 1986 and is based in Rajkot, Gujarat, India. The company was earlier known as Atul Auto (Jamnagar) Pvt. Ltd and changed its name to Atul Auto Pvt. Ltd on Aug 1994. The company, in May 2012, gave bonus of equity shares of Face value of Rs. 10 each fully paid up in ratio of 1 new for every 2 equity shares held- the company issued 36,57,200 equity shares as Bonus. Atul Auto Ltd recently on June 26, 2014 declared split in its face value from Rs. 10 to Rs. 5. Atul Auto limited manufactures and sells front engine and rear engine passenger, loading three wheeler auto rickshaws and its spare parts primarily in India. It offers goods carriers; passenger carriers; and special purpose vehicles such as chicken carriers, trippers, water tank carriers, soft drink carriers, mobile shops, hoppers, and bio hazard and vegetable vending vehicles that have applications in courier services, industrial products, laundry construction, dairies, caterers, FMCG distribution, LPG distribution, etc. The company provides its three wheelers under its brands namely: Atul Shakti, Atul Gem, Atul Smart, and Atul Gemini–Dz brands. The Company is also involved in the generation of electricity with a wind turbine generator at Gandhavi Village, Gujarat. The company has 150 exclusive dealers, more than 100 sub-dealers, 14 regional offices and 3 training centres in 16 states of India. Company exports its 3 wheelers in CBU/SKD/CKD conditions and as per the requirement of Importer. The company also exports its products primarily to Nigeria, Kenya, Egypt, Tanzania, and other African countries. The Company has its plant at Village Shapar at a distance of 18 kms from Rajkot. This plant commenced its commercial production from July 1992 and at present has an installed capacity is 48,000 vehicles per annum. Atul Auto Limited is locally compared with Bajaj Auto Ltd, Hero MotoCorp, Swaraj Mazda Motor Corp, Scooters India Limited, Automobile Corporation of Goa Limited, Commercial Engineers and Body Builders and globally compared with Aftab Automobiles Ltd of UAE, Ford Motor Company of USA, Harley-Davidson Inc of USA, Tesla Motors Inc of USA, Thor Industries Inc, Mitubishi Motor Corp of Japan, Bayer Motoren Werke AG (BMW) of Germany, Piaggio & C. SpA of France, Porsche Automobil Holding SE of Germany, Renault Societe of France, Volkswagen Aktiengesellschaft of Germany.

Investment Rationale:

Atul Auto Ltd is one of the key three-wheeler manufacturing companies in India. It has its manufacturing facility at Rajkot in the state of Gujarat. The company has production capacity of 48,000 units. In the last few years the company has improved its market position in the domestic 3- wheeler industry with incremental market share in the 0.5 tonnes goods as well as passenger carrier segment and is the third largest player in 0.5 T three wheeler industry and is expanding its distribution network beyond Gujarat, increasing its capacity and launching new products. Atul Auto, was struggling to maintain its monthly run rate of 1,000 units till 2009, and was dismissed as a fringe player, whose presence was largely restricted to Gujarat. But it all changed for the company after it started making rear mounted engines for three wheelers and focused on tier-II and tier-III cities. The company launched various variants to its vehicle line which helped company and now it commands a market share of 7.3 % as against less than 1 % five years ago, and has posted an average volume growth of 17 % in trailing four quarters compared with industry's average of 2 %. Atul Auto has defied all market hurdles & is growing consistently. Atul Auto has aggressively expanding itself and plans to launch more new variants, which will boost its top line and being a debt frees company will strengthen its bottom-line. With the bigger players catering to urban markets, Atul Auto saw opportunity in tier-II and -III cities and built its strategy around them. For instance, it customized its products to meet the expectations of smaller cities and rural areas. The customization included capacity to bear overloading, higher mileage of 35 a litre and a warranty of 24 months against 14-16 months offered by its competitors. This strategy worked for Atul Auto as sales started trickling in from other states other than Gujarat - the western state now contributes 40 % to its sales. States like Kerala and Assam contributes 7 % to its sales now, and the company is planning to make inroads into West Bengal and Tamil Nadu. Atul Auto invested around Rs. 12 crore to double its installed capacity from 24,000 units a year ago to 48,000 units a year in Rajkot. It is now building a new facility in Ahmedabad with an investment of around Rs. 100 crore, which would add another 60,000 units a year which will be ready in the next 18-24 months. The capital expenditure would be funded by internal accruals and the balance sheet is likely to remain Debt Free. Besides the Ahmedabad facility, the company is exploring the opportunity to increase its export share, where realisations are higher. The company is in discussions with several distributors in Africa. Atul Auto has been expanding its distribution network for the past few years. Expansion in dealer network in new states has enabled the company to grow above industry rate resulting in an increase in market share from 2.64 % at the end of Mar’07 to 3.81 % at the end of Mar’13. Going forward, the Company is going to explore new geographies coupled with new product offerings in the pipeline and anticipated increase in the capacities. At present Atul Auto Ltd exports are negligible, but there is huge potential in the under-developed or developing countries like Sri Lanka, Bangladesh, Malaysia, Kenya, South Africa and Brazil where reasonable transportation is an issue. Atul Auto is currently exporting in five African countries including South Africa and Kenya. It is also exporting in Bangladesh under a technical tie up. The company has planned to invest in Sri Lanka and proposal for that has been already been filed to Sri Lankan government in 2012. Atul’s specialised focus has clearly paid rich dividends to its shareholders and is evidenced by market share gains. With further capacity addition and new petrol product launch, Atul can efficiently tap export markets along with urban market in India and, thereby, continue the strong growth momentum.

Outlook and Valuation:

Atul has attained a pan-India presence over the past three to four years, establishing its brand in new markets and gaining market share, which grew from 2.0 % in FY09 to 7.7 % in FY14. However, one of the major shortcomings of Atul has been the lack of petrol engine products, which is more in use in urban areas. Management has guided to have a new petrol engine product, which will be launched in the next 9 to 12 months; going forward, it is believed that Atul’s volumes are likely to remain on the uptrend and the petrol product will give a boost to the export volumes. Atul Auto’s growth trajectory has been impressive with volumes growing at 40 % CAGR in FY09-14 even as the domestic three-wheeler segment has grown at about 7 % CAGR over the same period. Volumes have been improving on the back of added dealerships and increasing geographic presence along with market share gains in existing markets. Atul’s volumes have grown in both the passenger and goods carrier segments, where Atul has benefited from the launch of its rear-engine vehicle Atul Gem in 2009, which has helped to serve a wider audience. Currently, Atul is present in nearly all states barring Tamil Nadu and West Bengal. Also, the dealer’s network comprises 190 primary dealers and 110 sub-dealers across the country. The management has guided that the number of primary dealerships will rise to around 240 by the end of FY15E. This is likely to help meet the management target of 20 % volume growth for FY15E. In a segment that offers little scope for product differentiation, Atul has been able to carve out a niche for itself focusing more on providing good after-sale service and product customisation. So far, Atul’s management has been cautious with respect to capacity expansion. However, with continued volume growth, Atul will soon reach ahead of capacity in case demand revival is strong. The management is in the process of finalising the location for the new plant. The facility is likely to be fully operational by FY17E. Capex requirement for the project is likely to be around Rs. 150 crore, to be funded through internal sources without resorting to debt. The Indian auto industry has been recording tremendous growth over the years and has emerged as a major contributor to India’s gross domestic product (GDP). The industry currently accounts for almost 7 per cent of the country’s GDP and employs about 19 million people both directly and indirectly. The passenger vehicles production in India is expected to reach 10 million units by 2020–21. The industry is estimated to grow at a compound annual growth rate (CAGR) of 13 per cent during 2012–2021. In addition, the industry is projected to touch US$ 30 billion by 2020–21. Atul Auto has continued to outperform the industry which is facing demand related challenges amidst economic slowdown. The company has not only been able to maintain healthy performance at the top-line but at the profitability front as well. Though the significant part of the current top-line growth was largely contributed from the volume growth, it is expected that the realization to improve as well going forward. The company expects to exhaust the increased capacity by next fiscal. In addition, the geographical expansion plans and wider product line which are like to materialize over the period of 4-8 quarters are likely to result into robust financial for the company. In addition the company is working on a significant expansion of installed capacities from 48,000 units to 1,08,000 vehicles by 2014 which can be seen as a major driver. The project for Sri Lanka is still under consideration but the opportunities are huge there. Atul’s specialised focus has clearly paid rich dividends as evidenced by market share gains. With the further capacity addition and new petrol product launch, Atul can efficiently tap the export markets along with urban market in India and, thereby, continue the strong growth momentum. The company, in May 2012, gave bonus of equity shares of Face value of Rs. 10 each fully paid up in ratio of 1 new for every 2 equity shares held- the company issued 36,57,200 equity shares as Bonus. Atul Auto Ltd recently on June 26, 2014 declared split in its face value from Rs. 10 to Rs. 5 with its 1st September 2014 as its record date for split. The stock split will increase the liquidity among the public shareholding from currently of 49,29,195 shares of face value of Rs. 10 to 98,58,390 shares of face value of Rs. 5 each. Adjusted basis, the stock could trade between the price range of Rs. 371 to Rs. 400. The sharp rally in the stock price over the past two years has reflected the same. However, looking at the strong growth potential coupled with a strong balance sheet, robust return ratios, Atul Auto looks good buy and can reached Rs. 1100 in one years time (i.e. Rs. 550 after split). At the current market price of Rs. 649.50, the stock is trading at a PE of 17.50 x FY15E and 13.78 x FY16E respectively. The company can post Earnings per share (EPS) of Rs. 37.10 in FY15E and Rs. 47.10 in FY16E. One can buy ATUL AUTO LTD with a Short term target price of Rs. 685.00 and for Medium to Long term investment it can be Rs. 800.

KEY FINANCIALS	FY13	FY14	FY15E	FY16E
SALES (₹ Crs)	363.00	429.00	523.00	642.00
NET PROFIT (₹ Cr)	25.90	29.80	40.70	51.60
EPS (₹)	23.60	27.20	37.10	47.10
PE (x)	18.80	16.40	12.00	9.50
P/BV (x)	6.60	5.20	3.90	2.90
EV/EBITDA (x)	11.30	9.80	7.90	6.40
ROE (%)	34.90	31.50	32.30	30.60
ROCE (%)	48.00	42.50	43.70	41.60

I would buy ATUL AUTO LTD for Medium to Long term for target of Rs. 800 and for the shorter term the target would be Rs. 700.00. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of ₹ 597.55 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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