INDIA NIPPON ELECTRICALS LTD : SLOW BUT STEADY !!

Scrip Code: 532240 / INDNIPPON

CMP:  Rs. 390.50; Market Cap: Rs. 441.68 Cr; 52 Week High/Low: Rs. 435.00/ Rs. 315.00.

Total Shares: 1,13,10,712 shares; Promoters : 75,09,166 shares –66.36 %; Total Public holding : 38,01,546 shares –33.64 %; Book Value: Rs. 207.63; Face Value: Rs. 10.00; EPS: Rs. 23.82; Dividend: 90.00 %; P/E: 16.62 times; Ind. P/E: 55.23; EV/EBITDA: 9.86 times.

Total Debt: ZERO; Enterprise Value: Rs. 437.67 Cr.

INDIA NIPPON ELECTRICALS LIMITED: Incorporated in 1984, and converted into a joint venture in 1986 between Lucas Indian Service Ltd, a wholly-owned subsidiary of Lucas-TVS Ltd and Kokusan Denki Co. Ltd, Japan - a group company of Hitachi Japan. The company came out with an IPO on September 1986 offering 49,50,000 equity shares of Rs. 10 each. The company has not given any splits in face value of its shares. The company gave its first bonus in May 1994 in ratio of 1 bonus for every 2 held,  on December 1998 in ratio of 8 bonus for every 5 held, in October 2002 in ratio of 7 bonus for every 10 held and last bonus was announced in August 2011 in ratio 2 bonus for every five held. India Nippon Electricals Ltd is manufactures Electronic Ignition Systems for two-wheelers, three wheelers and portable engines. Over the years the company has enlarged its customer base and now supplies to most of the manufacturers of two-wheelers, three wheelers and gensets. INEL makes the entire range of 2/3 wheelers, digital and analog ignition products. The company mainly deals with the ignition units, coils, regulators, flywheel magnetos, capacitor discharge, etc. Its products include AC Generator, Capacitor Discharge Ignition & Transistor Ignition Units, Ignition coil Units, Integral Units (Combined CDI & Ignition Coil), Regulator / Rectifier Units. The company obtain certificates of recognition from BVQI for ISO 9001 in the year 1998, QS 9000 in the year 2001 and ISO 14001 in the year 2002. The company's manufacturing unit is at Hosur- Thali Road Uliveeranapalli Krishna giri District Tamil Nadu India, second one at Madukarai Road, Nettapakkam Commune Kariamanickam Village Pondicherry and third at Rewari Masani Village Rewari Haryana State India. It also has a wholly owned subsidiary with Lucas TVS Ltd and Kokusan Denki Company Limited, a member of Hitachi, Japan. And an investment arm IN Investments Ltd and helds all the 63,010 equity shares making it 100 % subsidiary of the company. INDIA NIPPON ELECTRICALS LTD is locally compared with Denso India Ltd, Minda Industries, Majestic Auto Ltd, Igarashi Motors, Remsons Industries, PPAP Automotive Ltd, Motherson Sumi Systems, REIL Electricals, Lumax Industries and globally compared with Delphi Automotive of UK, BorgWarner of USA, Federal Mogul Corp of USA, Denso Corp of Japan, Robert Bosch GmbH of Germany, SEM of Sweden, Mitsubishi Electric Corporation of Japan.      

Investment Rationale:

India Nippon Electricals Limited (INEL) was incorporated in 1984. The company is into manufacturing of electronic ignition systems, auto components and other related products for two wheelers, three- wheelers and portable gensets. Offers wide range of products INEL offers varied range of products to serve 2/3 wheelers, mopeds and portable engines effectively. Its products are used in different areas such as power generation, power management, ignition management, automotive electronics and test kits. The company manufactures rotors, stators, capacitor discharge ignition and transistor ignition units, ignition coil and control units, integral units such as combined capacitor discharge ignition and ignition coil units, regulators and rectifiers. Strong client base INEL is one of established players in the auto ancillary industry. It operates in both domestic and international markets. It has strong client base which includes clients like- TVS Motor, Hero Honda Motor, Honda Motorcycle and scooter, Bajaj Auto, Royal Enfield, LML, Lombardini India, Piaggio India, Honda SIEL Power Products, Birla Power Solutions, Kokusan Denki and others. INEL has successfully demonstrated to the two wheeler industry its ability to adapt to the changing business and technological needs of customers in the areas of quality and customer service. India’s automotive industry is one of the most competitive in the world. Leading auto maker expects Indian passenger car market to reach four million units by 2020, up from 1.97 million units in 2014-15. The Indian automotive sector has the potential to generate up to US$ 300 billion in annual revenue by 2026, create 65 million additional jobs and contribute over 12 per cent to India’s Gross Domestic Product, as per the Automotive Mission Plan 2016-26 prepared jointly by the Society of Indian Automobile Manufacturers (SIAM) and government. The Indian auto industry is one of the largest in the world with an annual production of 2.33 Cr vehicles in FY 2015-16, following a growth of 8.68 % over the last year. The Two Wheelers segment with 81 % market share is the leader of the Indian Automobile market owing to a growing middle class and a young population. Moreover, the growing interest of the companies in exploring the rural markets further aided the growth of the sector. The overall Passenger Vehicle (PV) segment has 13 % market share. India is also a prominent auto exporter and has strong export growth expectations for the near future. In FY 2015-16, automobile exports grew by 15 % over the last year. In addition, several initiatives by the Government of India and the major automobile players in the Indian market are expected to make India a leader in the Two Wheeler (2W) and Four Wheeler (4W) market in the world by 2020. The industry produced a total 1.42 Cr vehicles including PVs, commercial vehicles (CVs), three wheelers (3W) and 2W in April-October 2015 as against 13.83 in April-October 2014, registering a marginal growth of 3.07 % year-on-year. The sales of PVs grew by 8.51 % in April-October 2015 over the same period last year. The overall CVs segment registered a growth of 8.02 % in April-October 2015 as compared to same period last year. Medium & Heavy Commercial Vehicles (M&HCVs) registered very strong growth of 32.3 % while sales of Light Commercial Vehicles (LCVs) reduced by 5.24 % during April-October 2015 year-on-year. In April-October 2015, overall automobile exports grew by 5.78 %. PVs, CVs, 3Ws and 2Ws registered growth of 6.34 %, 17.95 %, 18.59 % and 3.22 % respectively in April-October 2015 over April- October 2014. During 2015-16, the two three wheeler industry grew 2 % and India Nippon Electrical sales posted a growth of 4 % over its previous year despite difficult market conditions. India Nippon achieved a 54 % growth in export business and the direct sales to aftermarket recorded a growth of around 36 % with the help of expanding the dealer network and product range. The company have secured business for EGR controller for small diesel engines; company will work closely with customer to meet BS IV emission norms. The company is jointly developing other technology oriented products like ECU for Electronic Fuel Injection (EFI), Integrated starter Generator (ISG) for two wheeler and off road engines with its technical partners. ISG & EFI are two critical new technologies that will be disruptive to the industry and with constant focus on R&D the engineers along with technical partners are building newer capabilities for the future. The company has planned major investment which will be fruitful in next two years. Great R&D facility and product line-up along with the strong clientele, India Nippon looks promising.  

Outlook and Valuation:

Incorporated in 1984, INEL was converted into a joint venture in 1986 between Lucas India Services Ltd ( a wholly owned subsidiary of Lucas- TVS Ltd) and Kokusan Denki Co. Ltd, Japan ( a group company of Hitachi Japan) to manufacture electronic ignition systems for two-wheelers, three wheelers and portable engines. In 1986, the company established its first manufacturing plant in Hosur at Tamil Nadu and started production to supply to TVS Motor Company for motor cycles. INEL offers wide range of products which include flywheel magnetos, capacitor discharge ignition units, ignition coils and others. Its manufacturing facilities are located in Hosur, Puducherry and Rewari. The company serves to domestic and international markets with a subsidiary viz- P T Automotive Systems Indonesia. The Indian auto component industry expects to grow by over four-fold to US$ 113 billion by 2020, as per the Automotive Component Manufacturers' Association (ACMA). The total passenger car production in the country will jump four times to reach 9 million cars in the next ten years.  Although a major chunk of this will come from the fast growing domestic market, exports are likely to form around 35 % of the total market by 2020. India would be among the top-five vehicle producing countries in the world by 2020. The 40 % of the auto component industry is dominated by body and structural products, 20 % by engines and exhaust, and 10 % each by suspension and braking parts, transmission and steering parts, electronics and electrical and interiors. By 2017, body and structural will account for 35 % of the auto component industry, engines and exhaust 20 %, suspension and braking parts, transmission and steering parts and electronics and electrical will account for 13 % each and interiors 9 %. India is turning out to be an attractive destination as a global outsourcing hub and manufacturing base for original equipment manufacturers (OEMs), especially after the global economic downturn. With the finalisation of the Automotive Mission Plan (AMP) India is expected to become a preferred destination for design and manufacture of automobile. The plan envisaged an investment of US$ 40 billion and provided a road map to help transform India into a global automobile player. The AMP proposed a 25-point plan that included making India a manufacturing and export hub for small cars, multi-utility vehicles, two and three-wheelers, tractors and components. The Government has taken many initiatives to promote foreign direct investment (FDI) in this industry like Automatic approval for foreign equity investment up to 100 % of manufacture of automobiles and components is permitted, the automobile industry is de-licensed, and Import of components is freely allowed. The Ministry of Heavy Industries and Public Enterprises has envisaged the Automotive Mission Plan 2006-2016 to promote growth in the sector. It targets to Increase turnover to US$ 122 billion–US$ 159 billion by 2016 from US$ 34 billion in 2006, increase export revenue to US$ 35 billion by 2016 Provide employment to additional 25 million people by 2016. India Nippon Electricals ltd being a leader in manufacturing of Electronic Ignition Systems for two-wheelers, three wheelers and portable engines, will surely be benefitted by the increased investments in auto sector and by increase export potentials. On the financial side INEL posted good numbers. Its June 2016 net Revenue came in at Rs. 84 Cr as against Rs. 78.33 Cr YoY. It posted total expenses of Rs. 76.83 Cr as against Rs. 71.77 Cr YoY. The company posted Net Profit of Rs. 6.12 Cr as against Rs. 6.11 YoY. India Nippon is a very small company with good financials and has strong cash flow generating capacity; the company has been able to keep its debt to equity lower and also been able to expand through internal accruals. India Nippon Electricals ltd is debt free company and can remain debt free due to its huge cash flow. At the current market price of Rs. 90.50, the stock is trading at a PE of 14.04 x FY17E and 13.01 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 27.75 in FY17E and Rs. 30.00 in FY18E. 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	FY15	FY16	FY17E	FY18E
SALES (₹ Crs)	327.73	339.65	368.90	400.25
NET PROFIT (₹ Cr)	22.66	26.93	31.35	34.00
EPS (₹)	20.05	23.83	27.75	30.00
PE (x)	17.57	14.46	13.25	12.25
P/BV (x)	1.79	1.62	1.48	1.80
EV/EBITDA (x)	8.43	7.14	6.05	5.70
ROE (%)	9.30	10.22	11.19	11.62
ROCE (%)	17.72	21.43	20.08	20.50

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 8 % on every purchase. (Why Strict stop loss of 8 % ?) -  Click Here

*As the author of this blog I disclose that I do not hold INDIA NIPPON ELECTRICALS LTD in my any of the portfolios.

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Disclaimer: 

This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible. 

As a Disclosures I Confirm that : 
I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article. 

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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

 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 8 % on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

*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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Disclaimer: 

This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.

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RETURN ON CAPITAL

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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