Key Data (as on November 2013) Month- November, 2013 Current Price- Rs. 300 Recommendation- BUY Current P/E-10 Target- 100% return within 1 year or so. ISIN-INE951D01010 Portfolio Allocation- Allocate 10%-15% of your total portfolio value. Keep a close look during the next 15-20 days, if the price comes into the range of 250-275, then don t forget to enter. Also be ready to invest more at any dips in the coming 2-3 months. Introduction- Back in the 1970 s, when transportation was a crucial problem especially in rural areas,late Mr. Jagjivanbhaii Karsanbhai Chandra (father of Mr. JJ Chandra, CMD of Atul Auto)decided to blaze a new trail. He was thinking of an affordable mode of transportation which can benefit rural folks of Saurashtra. The road conditions were not good but the need for transportation was increasing day in and day out. After thorough research and planning, he came up with a vehicle which was skillfully engineered from a motorcycle. And this is how the first chhakada was developed which later became a way of life for the people of Saurashtra. The improvements in technologies were done from time to time to make it a sturdy and comfortable vehicle. And like father like son, Mr. Jayantibhai Chandra also joined this mission. He took his illustrious father s vision further. He introduced diesel chhakada with many new features, and soon 150,000 chhakadas were rolling all over Saurashtra making it easy for passengers. Their passion did not end with success of chhakada. As of today, Atul Auto Ltd is a leading manufacturer of 3-wheeler commercial vehicles in the state of Gujarat. The company is now expandingng its presence in the other states of India at rapid pace. Company manufactures 3-wheelers under Atul Shakti, Atul Smart, Atul Gem and Atul Gemini-DZ brand names. Page 1
Company Information-The Company has its plant at Village Shapar at a distance of 18 kms from Rajkot.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 by expanding its distribution network beyond Gujarat, increasing its capacity and by launching new products. Atul Auto has further transformed from a regional player with a strong foothold in the states of Gujarat and Rajasthan to a pan-india player. As of now, they has 176 dealers throughout the country and expected to reach 200 by the end of FY14.Till date they had not penetrated only in few eastern states like West Bengal and Assam but as per the management they will soon enter into those market. Investment Rationale Strong growth much ahead of the industry: - Atul Auto was in very bad phase during FY 07 FY 09 as they entered into the collaboration with Lombardi to manufacture engines, but they receive lots of complaints and recall around 85000 vehicles for engine replacement. After that the company successfully charts its own growth path. Last 3 years CAGR profit growth stands at 78% and sales growth stands at 45%. Such high growth is mainly due to its low base, still growth is far better than its peers. Growing fast in challenging environment: - The most surprising fact is that while the entire 3-wheeler auto industry is facing several headwinds, reporting de-growth year after year, at the same time Atul Auto is the only player showing strong financials. Growth is not fueled by debt: - In spite of such high growth rate and such a capital extensive business, Atul Auto successfully pared down its debt during the last 4 years. At the end of FY13 they are debt-free company. Debt-free company is very hard to find in auto industry. Highly Efficient Management: - During the last 3 years Atul Auto is consistently improving its operational efficiency. Last 3 years average ROE stands at 34% which argues well for highly efficient management. ROCE is also very healthy and much above industry average. The business generates sufficient cash flow to fuel its growth. Page 2
Shareholder-friendly management: - During the last 4 years dividend payout ratio of Atul Auto stands at above 26%, which is great for such a high growth company. Jayanthibhai Chandra and his family and Mr. Mahendra Kumar Patel and his family are the promoters of Atul Auto. They hold 56.62% stake in the company and therefore have high ownership in the business which is good from the perspective of minority shareholders. As on September, 2013 the Promoters had not pledged a single share in the company, which is again a positive sign. Strong and expanding distributor network: - Atul Auto has a pan-india presence with 176 dealers and more than 120 sub dealers. Management is expecting to reach 200 dealers by the end of FY14. Further they are ready to enter eastern states like West Bengal and Assam. Such expansion will surely fuel future growth rate. New product launch: - Atul Auto generates 80%-85% of revenue from its diesel engine based models, while Petrol, CNG and LPG models account for 65% of the entire 3-wheeler industry. Thus new product launch in Petrol, CNG and LPG segment will help the company to sustain its growth rate. Capacity Expansion is on cards: - Atul Auto is ready to set-up a new plant to launch petrol powered 3 wheeler. This plant will be operational by 2015. This capacity expansion will surely help the company to keep its growth momentum. Export is the key: - Going forward, exports will be the fastest growingg segment of Indian 3-wheeler industry. Atul Auto is ready to cash out that opportunity and has developed a 0.35 tones passenger carrier. After the import duty hike from 51% to 100%, the company is awaiting for the government approval from Sri Lanka to set-up a 100% subsidiary for assembling the passenger vehicles. Atul Auto is already present in Bangladesh since 2011. It has started exports in Nigeria, Kenya, Egypt, Tanzania and some other African countries. Going forward, export will remain one of the key growth drivers for Atul Auto. Page 3
Investment Risk 3-Wheeler Industry Slowdown: - The major risk is in the slowdown of the overall 3- wheeler industry. Till date Atul auto is growing fast just because of its small base and market expansion. After few years the business will be matured, keeping very little room for further new market expansion. Till then if slowdown remains (low probability), then it will surely affect the volume growth of Atul Auto. Not so strong R&D team: - There is no such significant product differentiation in 3- wheeler industry. Atul Auto doesn t have any strong R&D team to manufacture technologically advancedd product. So, competition from other players can expose a threat. But I think for the next 2-3 years there s no need to worry in this front, because till that growth will simply come from new market expansionn and product launch. Change in Import duty can hurt export: - Atul auto is betting big on export. Here change in import duty of any countries (like in Sri Lanka) can hurt export income. Financial performance of Atul Auto (Yearly) Narration Mar-09 Sales 117.53 Expenses 114.92 Operating 2.61 Other Income 3.33 EBIDT 5.94 Depreciation 2.46 EBIT 3.48 Interest 2.81 before 0.60 Tax Tax 0.13 Net 0.46 Mar-10 Mar-11 Mar-12 201.80 298.05-13.14 182.69 270.47 13.14 19.11 27.58 1.02 0.95 0.59 14.16 20.06 28.17 3.87 4.25 4.26 10.29 15.81 23.91 3.16 1.74 0.76 7.12 14.07 23.15 2.61 4.60 7.65 4.54 9.43 15.59 Mar-13 363.84 323.76 40.08 1.98 42.06 4.44 37.62 0.40 37.22 11.68 25.92 Page 4
Financial performance of Atul Auto (Quarterly) Narration 30-06-2012 30-09-2012 31-12-2012 31-03-2013 30-06-2013 Sales 76.79 85.84 103.31 96.91 85.53 Y-O-Y Sales 26.61% 14..36% 29.77% 17.24% 11.38% growth Operating 6.74 9..42 12.41 11.48 7.24 Operating 11.40% 25..27% 81.43% 62.38% 7.42% growth Y- O-Y 3.86 6..21 8.28 7.56 4.32 Y-O-Y 17.33% 22..73% 167.96% 81.73% 11.92% growth Operating 8.78% 10..97% 12.01% 11.85% 8.46% Margin Net Margin 5.03% 7.23% 8.01% 7.80% 5.05% 30-09-2013 108.72 26.65% 11.43 21.34% 7.38 18.84% 10.51% 6.79% Few points on financial performance- Last 5 years CAGR sales growth stands at 35% and profit growth stands at 81%. This company is successfully expanding at a rapid pace despite macroeconomic hurdles. While maintaining high growth rate, the company successfully pared down its debt. As of now Atul Auto is a debt-free company with huge cash flow from operations. Operating profit margin of the company also improved significantly. From 2.2% in FY09 to 11.2% in the last fiscal, the company is continuously improving its margin. Page 5
Final Note- This company has the potential to generate 100% return within the next 1 year or so. However I am expecting high volatility in the stock price. Normally auto stocks have direct co-relation with interest rate and economic growth. So any positive /negative surprise from any macro-economic event can hamper the mood. Atul auto has rock solid fundamentals with high growth potential. So, use this volatility in your favour. Don t hesitate to buy more at dips and stay away from buying in case of sudden price jump in upward direction. Despite of any short term headwinds this stock will surely outperform in long term. Happy Investing!!! Page 6