ATUL AUTO LTD: STOCK ON TOP GEAR !!!

Scrip Code: 531795 / ATULAUTO

CMP:  Rs. 502.30;Market Cap: Rs. 1,102.20 Cr; 52 Week High/Low: Rs. 721.80 / Rs. 240.28

Total Shares: 2,19,43,200 shares; Promoters : 1,20,84,810 shares –55.07 %; Total Public holding : 98,58,390 shares – 44.93 %; Book Value: Rs. 41.76; Face Value: Rs. 5.00; EPS: Rs. 17.92; Dividend: 75.00 % ; P/E: 28.08 times; Ind. P/E: 23.68; EV/EBITDA: 16.09.

Total Debt: ZERO Cr; Enterprise Value: Rs. 1,057.05 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 Shakti 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 the country and has its manufacturing facility at Rajkot in the state of Gujarat. Atul Auto Ltd was conferred with "IndiaMart Leaders of Tomorrow Award 2013" in Auto Components sector of West Zone presented by ET Now. The Company manufactures popular 3-wheelers in the sub 1 tonne category targeting the passenger and cargo segment. In passenger segment, the Company manufactures the Diesel & CNG powered carrier for carrying 3 to 6 passengers. In the cargo segment, the Company manufactures vehicles with a rated carrying capacity of 0.50 tonne. Both these vehicles have been approved by the Automotive Research Association of India under the Bharat Stage-III. The Company has its existing plant at Village Shapur, near Rajkot. The plant commenced its commercial production from July 1992 and has installed capacity is 48,000 vehicles (from April 2013) per annum. The company has improved its market position in the domestic 3-wheeler industry with incremental market share in the goods as well as passenger carrier in 0.5 Tonne segment (third large player in 0.5 T three wheeler industries). This has happened with established distribution network, increase in capacity and launch of new products. This increase in capacity was achieved through local level innovations and process re-engineering, and did not involve any major capital expenditure. Atul Auto has defied all market hurdles & is growing consistently. The company launched various variants to its vehicle line, thus by increasing its market share to over 7 % from 2 % in FY09. Atul Auto has aggressive expansion plans and more variants are to be launched, which will boost the company top line, and being debt free strengthens the bottom-line as well. The Indian automobile industry has been growing at a remarkable rate over the years, contributing approximately 7 % to the country’s GDP and employing about 19 million people. However in recent years, it has been going through challenging times with both production and domestic sales declining due to weakening economic sentiments caused by the slowing economy, volatile fuel prices and expensive loans. India is one of the largest manufacturers of three-wheelers in the world with an estimated production of 850,000 units annually. Of these, almost 500,000 units are sold in the domestic market, with exports comprising the balance 350,000 units. Three-wheelers play an important part in transporting both passengers as well as goods, providing a cost-effective alternative for last mile connectivity in both urban cities as well as rural towns of the country. With easier permits available for CNG-LPG vehicles, three-wheelers are emerging as a popular alternative for both personal and mass transportation needs. The Indian automobile sector is a fully de-licensed industry and free imports of automotive components are allowed. The outlook for the Indian automobile sector is positive. The sector is expected to resurge in 2015 on the back of revival in demand both from consumers as well as industry. Driven by a renewed confidence in the economy and a general improvement in liquidity and sentiments, demand is expected to rise as early as in the first quarter of FY 2014. The industry estimates demand to pick up to 5 % in the year 2014-15 and return to double digit demand in the year 2015-16. The industry is further hopeful that the new government will favourably consider reduction of excise duty, which would result in unlocking middle-class demand. Faster economic growth coupled with the government's policies is likely to drive volumes and revive the Indian automobile sector. A fall in interest rates and stable fuel prices are expected to create an environment conducive for growth in this industry. Many foreign companies have also started to show their presence in India leading to a very competitive automobile market in the country, which augurs well for the sector's growth. It has been predicted by IHS Automotive, a global market information provider that India will become the third largest automotive market in the world by 2016 ahead of Japan, Germany and Brazil, riding on its domestic automotive sales. Atul Auto Ltd.’s main forte has been rural markets, especially the large diesel segment, which is of a strong 2.5 to 3 lakh unit market. The company has a significant market share in the goods carrier segment in which it is a strong player. 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. The increase in dealerships across the country could propel faster volume growth. Atul’s market share has grown in its target market across the years. It is interesting to note that Atul has as of now only been able to target 60 % of domestic market due to absence of petrol variant. The entry into petrol segment, increasing capacity and footprint could lead to faster growth in market share in the coming years. Atul Auto Ltd would be launching petrol based three-wheelers in the next 6-8 months to tap growth in export markets and urban markets as several new permits are likely to be issued to markets like Mumbai and New Delhi. The company has been doing a lot in the last few months to increase its export share, where realizations are higher. Company is in the process of launching gasoline three-wheelers which is the correct product for overseas market. Company is also establishing direct marketing network around the prospective geographies. The new product is likely to boost export volumes with the management expecting exports to grow significantly on a low base. The company has already established six distributors in Kenya, Mozambique and Bangladesh which will enhance company's expansion plans. Atul Auto Ltd is expected to witness a product mix improvement in the coming years with the launch of petrol-alternate fuel versions coupled with an entry in export markets. Both these factors could aid in improving average realisations from present levels.

Outlook and Valuation:

Atul Auto Ltd. is one of the youngest players in the 3 wheelers business with humble beginning in 1992 that started with manufacturing of Chhakaras (Rural Transportation Vehicle- RTV). Company produces auto rickshaw under Atul Shakti, Atul Smart, Atul Gem and Atul Gemini-DZ product names. Atul Auto is the only pure play 3-W manufacturer in India. Atul Auto’s growth trajectory has been impressive with volumes growing at a CAGR of 34 % over FY09-15. With 18 % share in the goods carrier segment and 5 % share in the passenger carrier segment, Atul has reached a respectable size in the market. Atul has also gone pan-India with a presence across almost all states. The company launched various variants to its vehicle line which helped company to now command overall 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 free 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. India is one of the largest manufacturers for three-wheelers producing volume of 950,000 units p.a. and growing at 6 % to 8 % p.a. having a domestic market of 550,000 units p.a. Three wheelers is an important element of goods transportation in the country as it provides last mile connectivity in the metro and urban markets where entry of large commercial vehicles into city limits is increasingly getting restricted and it is the ideal and most widely used mode for goods transportation in rural and semi urban markets. Also it is a cost effective mode for personal and mass transportation. Atul Auto Ltd.’s passenger segment is likely to see robust growth in domestic markets on account of government focus on improvement in rural road infrastructure and three-wheelers continue to be a popular mode of passenger transportation. New permits for fuels like CNG-LPG driven vehicles are available more easily. Passenger application in the rural and semi urban areas will continue to grow. Moreover availability of easy financing by banks and big NBFCs will provide more impetus to three-wheeler sector in India. It is believed that India’s three-wheeler industry is on the cusp of growth over the next few years and company like Atul Auto which is a dedicated three-Wheeler player will surely be one of the major beneficiaries of revival in the sector. Atul’s cargo segment will also witness good amount of volume growth on the back of added dealership which will provide good penetration to Atul Auto Ltd in the tier II and tier III cities along with improvement in urban areas as well. Growth in key user industries like fmcg, pharma, retail, construction etc. will augur well for the company as major retail push by these industries in tier II and tier III cities and smaller towns where three wheelers serve as the ideal mode of goods transportation. The management has maintained the guidance for double digit growth for the next couple of years. However, they expect volumes to remain subdued in H1FY16E and expect it to pick up from H2FY16E onwards. Erratic rains in Q4FY15 have impacted rural demand from where Atul Auto derives a majority of its volumes. Hence, demand is likely to be under pressure in the near term. The management has guided that the dealer network expansion will continue with 25 to 50 new dealers likely to be added till FY17E. The current count of touch points stands at 325 with primary dealers at 200. On the export front, the company has 7 distributors that are also likely to added, going forward. The land acquired for the new plant is likely to be commissioned in H2FY17E. The current capacity of 48,000 units is likely to get expanded to 60,000 units by carrying out the de-bottlenecking activity. The management has guided that capex for FY16E could be Rs. 50 crore. The company witnessed a three to four month delay in receiving approval from Automotive Research Association of India (ARAI) for its petrol model while the new model currently in the testing phase and is under review. Post the completion of this phase, the company would launch its new petrol engine model, which is likely to take another six to eight months. Atul possesses strong balance sheet strength, with zero debt on the books. For the major capex planned in FY15E, FY16E, the management has guided at meeting the capex need by using existing cash as well as CFOs. Atul’s debt-free status is likely to sustain for more years to come with CFO generation which is likely to remain robust as the demand scenario improves. Atul Auto Ltd's performance has been quite encouraging and consistent with strong top line and bottom line growth. Atul’s specialised focus has clearly paid rich dividends as evidenced by market share gains. India's 3-wheeler growth trajectory looks quite promising going ahead with government thrust on infrastructure and focus on encouraging new and small entrepreneurs, which will boost the sales of 3-wheelers. In a scenario where multiple challenges in the economy and industry have weighed down heavily on the automobile industry, with most players struggling to cope with falling sales and margins, it is believed that the worst is over for automobile industry and the sector is poised to grow well on the back of improving economy with strong government at the center and improving consumer sentiments. At CMP of Rs 502.30, the stock currently trades at 23.20x FY16E EPS of Rs 21.65 and 17.99x FY17e EPS of Rs 27.91, even thought the stock has run up from the recent lows of Rs. 377 odd levels, it's still attractively valued considering the strong prospects of the company in domestic markets as well as its expected ramp up in exports. Atul Auto Ltd’s valuations leave scope of improvement looking at three-wheelers sector prospects and expected profitability. Company can show a conservative growth of about 21 %. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.  

KEY FINANCIALS	FY14	FY15	FY16E	FY17E
SALES (₹ Crs)	430.14	492.80	575.88	673.36
NET PROFIT (₹ Cr)	29.80	40.57	47.52	61.25
EPS (₹)	13.58	18.49	21.65	27.91
PE (x)	14.20	30.00	20.30	15.80
P/BV (x)	4.30	10.10	6.20	4.90
EV/EBITDA (x)	19.00	18.20	12.30	9.80
ROE (%)	31.50	33.50	30.60	31.30
ROCE (%)	45.60	49.40	44.10	44.20

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*As the author of this blog I disclose that I do not hold ATUL AUTO LTD in my any of the portfolios.

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