Equity | India | Automobile | Two-Three Wheelers

Ratio &Atul Auto Ltd.Drive on the clear way….

August 10, 2015Compan

y Analysis Made By- Mohit Kanjwani(2015PGP137)

CMP (`)Face Value

5396

52Week Low 52 Week High

328 721

Market Info (as on July 08, 2015)

BSE Sensex 25,622

Nifty S&P 7.788

Stock Detail

BSE Group B

BSE Code 531795

NSE Code ATULAUTO

Bloomberg Code ATA IN

Market Cap (`Crore) 868

Free Float (%) 47%

Avg. Daily Volume (BSE)

111939 Div. per share (`)

5.00 Shares Outstanding (mn) 21.94

Company Snapshot

Atul Auto Ltd. (Atul) is the Gujarat based small sized three wheeler manufacturing company. It is one of the youngest players in the 3 wheeler business with humble beginning in 1992. It has well diversified product portfolio of 45 models and is inventor of the most popular rural transport vehicle Chakkada’. It has been growing continuously at 19.5% for last 5 years. Company has market presence in 16 states of India with 200 primary dealers & 120 secondary dealers along with overseas presence in market like Bangladesh, Tanzania, Kenya, South Africa, Nigeria & Jamaica. Company has 8% market share in total domestic industry.

Sector Overview

Fast growing industry provide an edge, with huge demand abroad

Strong initiatives taken by central government like rural transport and infrastructure development will help to boost the volumes. 3-wheelers are an important element of goods transportation in the country. India is one of the largest manufacturers for 3-wheelers producing volume of ~ 950,000 units p.a. and growing at 6-8% p.a. Having a domestic market of ~ 550,000 unit’s p.a. And is also a cost effective mode for personal and mass transportation. Export markets include developing and under-developed countries like Bangladesh, Sri Lanka, Indonesia, African countries and

Latin American countries. 3-wheelers are an important element of goods

transportation in the country. It is the ideal and most widely used mode for goods transportation in rural and semi urban markets. It provides last mile connectivity in the metro and urban markets where entry of large commercial vehicles into city limits is increasingly getting restricted.

Promoters FIIs DII Others

52.70 6.06 8.46 32.78

Share Price Performance

280

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80

Sep-

14O

ct-1

4Nov

-14D

ec-

14 Dec

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5Feb

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15 Mar

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pr-1

5Apr

-15 M

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-15

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Returns Period. 1Mth

3 Mths

6Mths 1Yr

Atul Auto (%) 14.5 (17.6) (27.4) 72.2Sensex (%) 5.24 (1.21) 4.69 7.94

Source: Capitaline.com,Bloomberg Database, Economictimes.com, Company’ Annual reports

Favorable economic conditions like Make in India and increasing rural disposable income

As India is capitalizing more and more on this Make in India initiative, it facilitates more and better production capacities with improved technology as well as the increasing rural disposable incomes leads to some great investment opportunities in this sector. Also with the falling crude price leading to cuts in the petrol prices in India, the demand for such public transport will increase.

A key summary of ratios which makes Atul Auto a safer bet

Atul auto is having very healthy balance sheet. The company has maintained the operating margins instead of making the strong volume growth. This shows the high operational efficiency in the business. EBITDA margin has grown from 9% in FY11 to 12% in 2015 in the span of five years. Whereas operating margins has grown from 8% in FY10 to 12% in FY15. The company has strong ROE which makes company more lucrative. ROE for 2011 stood at 25% which has grown to 37% in 2015. The ROCE of the company has also grown from 29.96% in 2011 to 55.26% in 2015. This creates a great investment opportunity for the investor.

Equity | India | Automobile | Two-Three Wheelers

Strong Distribution Network

Atul auto has strong distributing network across the country. Atul auto has 17 regional offices in the country including almost all the major states. The company also has three training centers at Gujarat, Chhattisgarh, and

Andra Pradesh. Atul auto has strong dealers network ensures the consistent sales over geographical splits. The Company has 200 primary dealers across the territories including rural and urban parts of the country. The company also strengthens its network with 120 secondary dealers. This makes company business structure more strong. Now company has started its business overseas, the company has presence in the countries like Bangladesh, Kenya, Tanzania, South Africa, Nigeria, and Jamaica. This also creates a huge business opportunity overseas.

Market share

Market share

Atul Auto is the only pure play 3-W manufacturer in India. With ~17% share in the goods carrier segment and 5.5% share in the passenger carrier segment, Atul has reached a respectable size of overall 8% share in the market. Atul has also gone pan-India with a presence across almost all states. The company in its management discussion portion mentions volumes to remain on the uptrend as the market share increases in newly launched markets. “Also as the new petrol engine variant to be launched next year is likely to add incremental volumes as Atul targets urban markets for growth”

Comparison with the index(PE & PB ratio’)

Profitability Ratio’

While the market has discounted the company positively, with its share price increasing continuously, with continuously rising PBIDTM, ROCE, RONW and ROE till 2013, the financial year, 2013-14 witnessed a decline as the entire industry witnessed a problem of slowdown which was explained as because of rising petrol and diesel prices as well an inflation. However inspite of the same a capex infusion of 150 Crore was done next year in the new Gurjat plant which is expected to be operational by December 2015

At the CMP of `396, Atul Auto Ltd. is having a PE of 32.45, Compared to the PE ratio of the CNX 40 Automobile benchmark peers at 22. Although Atul auto limited has only 8% market share as compared to its peers, where majority of players are private ones. As for the book value of the

company, it has increased, but hasn’t out beaten the industry average and this raises a question why is the book value of company less than industry average, if it has beaten it in almost all other aspects? The split in shares for 1:2 leading to lesser book values as for the earlier years, established companies like bajaj auto enjoy higher book value’ nearly 369 leading to higher average.With good operating margins, i.e. 12% in 2015 as compared to 6% compared with industry average, there is a good investment opportunity.

Comparison with the index(Share Price of Atul Auto Vs Index Value)

At the CMP of `396, Atul Auto Ltd. is having a PE of 32.45, Compared to the PE ratio of the CNX 40 Automobile benchmark peers at 22. Although Atul auto limited has only 8% market share as compared to its peers, where majority of players are private ones. As for the book value of the company, it has increased, but hasn’t out beaten the industry average and this raises a question why is the book value of company less than industry average, if it has beaten it in almost all other aspects?

With good operating margins, i.e. 12% in 2015 as compared to 6% compared with industry average, there is a good investment opportunity.

Cash Flows

Athough the cash flow from operations has been positive and increasing, it fell in 2013 and rose again in 2014, this happened because, of the expansion in distribution networks, which involved huge expenses both domestic and foreign. Also the graph only tells us one story that throughout since 2012, cash flow from investing activities has been negative as more and more investment is being made in the new petrol engine product’ vertical integration so as to moving away from supplier uncertainties

Foreign Currency Earnings

The earnings as well as expenses from foreign operations is continuously rising after 13 but there has been a sudden jump in the same after March 14, and this calls for a peek into companies annual report for the same year and the management discussion explains, six distributors were established in Kenya, Mozambique, Bangladesh in 2014 leading to higher income and higher expenses, or more foreign presence.

Sales & other income

While income coming from other sources rose almost by 200% in 2015, this was a result of a provisions of nearly 3 crores written back and also misclleneous income of nearly 2 crores, the same happened because Also net sales have witnessed a 21% CAGR Atul Auto is the only pure play 3-W manufacturer in India and has also reached a respectable size in the market. With the volumes to increase as Atul has also gone pan-India with a presence across almost all states as well as new geographic penetration shall also foster such

Share Market

As we can see from the graph the share has made higher lows and higher highs, this has been supported with higher volumes such that the share has given returns of 1000% points in nearly 5 years, such a trend is supported by higher EV/EBIDTA. However the book value of the company is reducing, as a result of the split in shares 1:2 which the company did in 2014.

Some fluctuations in the liability items

The total net worth of the shareholders has been continuously increasing. As we know a promoter can make money via several ways, but the management quality and quality of its earnings has been continuously increasing as visible from the contribution to the reserves. Also the management believes in great expansion prospects abroad.

Working Capital Analysis

The working capital has been continously increasing as against the industry trend of negative working capital. This is because of current assets, growing at a higher pace of CAGR 15% as compared to current liabilities at the rate of 8% year over year. With more expansion plans the working capital requirement of the company is high and such a requirement is met internally as the company has also written of its debt.

Debtor & Creditors Velocity

The amount of creditors in absolute terms has been decreasing with their velocity increasing. However the opposite trend can be seen in case of debtors whose value has been continuously increasing with their velocity decreasing over period of time. Such an increase and decrease is an outcome of good management practices and the belief of its debtors and creditors in the management and doing business with it.

ROCE

Comparing with the general trend of the industry, the return on capital employed has been decreasing with changing its trend after 2014. However for Atul Auto, the trend has been opposite and it defies the general slowdown the industry has been witnessing. The company is a premier in diesel auto’ and enjoys huge premium in the same.

RONW

With the net worth of the company increasing, the RONW has still been increasing as the profit of the company has been increasing over the years as well as the trend has been opposite as of the industry. One of the factors which allows the company to enjoy a premium as compared to rest of the industry is 0.5 ton Atul smart fe which is more of a loading truck as well as a commercial atuo of the model enjoy a monopoly in this segment.Current Ratio

The current ratio of the company is more than one, and beat the industry average for continuously 5 years and the margin between the two is continuously increasing. This has been possible with current assets growing from 28 crore to 89 crore in 5 years and current liabilities increasing from 20 crore to 50 crores, making a current asset growth rate of CAGR of 15% while CAGR of liabilities being only 8% .

Interest Coverage Ratio

The interest coverage ratio has been almost in tandem during all 4 years and beat the industry in 2014. However the ratio declined in 2015. This phenomena can be explained by rising net profit till 2013 and reduced interst expenses till 2013 as the company paid off its debt in 2013 and became a debt free company.

Inventory Turnover Ratio

There is a divergence in the year 2013 which has primarily been because of the slowdown in the industry. The company believes the high interest rates in the economy were a

Inventory Turnover Ratio

There is a divergence in the year 2013 which has primarily been because of the slowdown in the industry. The company believes the high interest rates in the economy were a

Fixed Asset Turnover ratio

The fixed asset turnover ratio is showing some strange trends with earlier decreasing and then increasing over period of time. The reason is the continuous expansion investments in the fixed assets capacity for the year. The company expanded its production capacity from 30,000 units to 40,000 units and additionally its new plant in Rajkot is expected to increase the capacity to 60,000 units and investment in the plant has been predominantly in year 2012-13.

Dividend Payout Ratio

The payout ratio for the industry has been very much fluctuating, showing the variation in the earnings and in payment of dividends over period of time. However in case of Atul auto, the payout has been constant and nearly 30%. The company is able to write off its debt as well as well as pay a constant dividend. Such a consistency has led to a good fundamental company’ perspective in the minds of investors which is reflected even in the share price.