Atulauto Hbjcapital 131120103110 Phpapp01

Atul Auto Ltd - High Growth company with Attractive Fundamentals

Content Index

• Atul Auto Limited – Investment Snapshot :- Slide #3 • Industry Opportunity – An Overview:- Slide #5 • Atul Auto Limited – Business Overview :- Slide #10 • Investment Rationale :- Slide # 17 • Atul Auto Limited – Financials:- Slide #24 • Concerns & Reasoning :- Slide #26 • Conclusion :- Slide #29

“ Specialists in discovering Multibagger stocks “

Atul Auto Ltd – Investment Snapshot (as on May 30, 2013)

Recommendation :- BUY o

Maximum Portfolio Allocation :- 3-4 %

Investment Phases & Buying Strategy

1st Phase (Now) of Accumulation :- 70%

Current Accumulation Range :- 160-185 Rs

Atul Auto is a typical Small Cap stock, where the Business is trying to grow aggressively from a low base in a Large Industry. While Risks continue to be there, the past 3 years of performance gives us more conviction in buying the stock.

Core Investment Thesis :

The Size of the Opportunity is large and the Business is less capital

Intensive with good Return Ratios, thereby enabling an Investor to

earn disproportionate Returns – if the company is able to

execute its Growth plan. This along with an Opportunity to buy a

company with good Near term track record at cheap valuations will

help us earn Multibagger returns.

Current Market Price – Rs.184.90 Current Dividend Yield – 3.28% Bloomberg / Reuters Code –ATUL.BO/ ATA.IN BSE / NSE Code – 531795 / ATULAUTO Market Cap (INR BN / USD Mn) – 203 /33.83 [1 USD – Rs. 60] Total Equity Shares [Mn] – 11.2 Face Value – Rs. 10 52 Week High / Low – Rs. 191 / Rs.160.05 Promoter’s Holding – 56.62 % Institutional Holding – 0.11 % Other Holdings - 43.27%


Key Investment Highlights

• Rising Market Share :- Company since the launch of its RE backed product, has been able to consistently grow faster than the Industry. Even during the tough economic environments of the last 2 years, Atul Auto has grown well. The Company’s market share has increased almost 10X over the last decade which is huge, albeit from a low base.

• Large Opportunity :- Even after the strong Growth of last few years, Atul Auto still occupies a Market Share of less than 15% across all segments. The Market opportunity is big enough for the company to grow consistently for the next several years, just by deeper penetration and plugging voids in the Product portfolio.

Et

• High ROE business :- The Industry is not Capital Intensive and considering the High Capital Asset turnover of the Business, Atul Auto will continue to be a High ROE business despite the temporary fluctuations in Margins. Company’s current RONW of over 30% will only improve going forward.

• Ambitious Growth Plans :- Atul Auto has very ambitious Growth plans which can be seen from the aggressive Capacity expansions. While the current capacity itself is over 5X the company’s sales in 2009, it has already started planning to double the capacity over the next few years.

• Strong Balance Sheet :- Atul Auto has a clean Balance sheet with no Debt and little complexity. The Working Capital management is tight leading to strong Cash Flow generation. This Balance sheet strength removes some of the Risks associated with small companies in Cyclical sectors.

• Good Management with track record :- Company has a good aggressive management which has rewarded shareholders with liberal bonus and dividends. Apart from that the company disclosure policies are good enough with little worries about the Corporate Governance part.

• Strong Growth Levers :- With Macro Economic scenario expected to improve slowly over the next 2 years along with increasing Rural Prosperity, we believe that strong 3-Wheeler sales are her to stay. Margin growth also has levers in the form of Increasing Scale, Brand Visibility, Bargaining power with both Suppliers and Customers etc.

• Compelling Valuations :- Despite the improving Fundamentals and strong performance over the past few years which has decreased the Business Risk, the stock continues to trade at less than 8X trailing earnings allowing us to buy a good growing business at cheap Valuations.


Indian 3-Wheelers - Industry Overview


Indian Auto Industry


• India’s Auto Industry has been growing at a CAGR of 17% from 1991 and is one of the fastest growing market globally. • Even after this spectacular growth ,the contribution of Indian automotive sector is low when compared with global average. • The automobile sector contribution to GDP is about 7% and is the key driver of the growth of the economy. • The two wheeler segment dominates the auto industry with a share of 76% and is the second largest market in the world. • The share of three wheeler segment in the Indian Auto space is increasing and this is likely to continue given its smaller size which can penetrate smaller streets. • The general health of the automobile Industry is affected by the performance of the Indian economy’s growth prospects.

Overview of the three Wheeler Industry


• India is the world’s foremost producer, consumer and exporter of three-wheelers with domestic sales of about 5.13 lakh units in 2012.

• Three wheelers are widely used in India as an affordable means of short to medium distance public transportation and last mile connectivity for goods transportation.

• Apart from the domestic demand ,India has also emerged as an important export hub for three wheelers with presence in some of the South Asian ,African and Latin American markets that are replicating Indian growth story with rising disposable incomes but inadequate public transportation system.

Indian Three Wheeler Industry


Competitive edge of 3 wheelers over 4 Wheeler SCV’s


• Three wheelers are better than 4 wheelers as they are able to have a better access due to its smaller structure which enables it to connect with smaller roads. • The three wheelers are better for their service. The service of a three wheeler is so simple that even the driver can repair it whereas a four wheeler has to be serviced only in a workshop. • The maintenance cost of a three wheeler is negligible when compared to a 4 wheeler which increases maintenance cost of the vehicle. • The resale value of three wheelers is also better than that of 4 wheelers.

Particulars Three Wheeler Four Wheeler

Tonnage 0.3 to 0.5T 0.5 to 1.25T

Ex-showroom Prices 150000-180000 180000-400000

Downpayment+Insurance+Registration Rs.55000-Rs.60000 Rs.65000-Rs.120000

Availability of Finance Medium High

Key Financiers Co-operative Banks Commercial Banks & NBFC's

EMI(Rs.Per Month) Rs.4500-Rs.5000 Rs.5000-Rs.9500

Fuel Efficiency(Kms/Liter) 30-32 15-25

Monthly Fuel Cost(Rs) Rs.2200-Rs.2500 Rs.3500-Rs.9000

Maintainence Cost per Month Rs.900 to Rs.1200 Rs.1500-Rs.2250

Insurance Cost per Month Rs.600-Rs.750 Rs.1250-Rs.1750

Other Operating Cost Rs.500-Rs.750 Rs.750-Rs.1000

Toll charges & other Overheads Rs.1000-Rs.1250 Rs.1500

Monthly Income per Month Rs.18000-Rs.20000 Rs.25000-Rs.40000

Atul Auto – Business Overview


Atul Auto – A Snapshot • Atul Auto manufactures 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. •The company has 150 exclusive dealers and more than 100 sub-dealers in 16 states of India.


• 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. Company has also been developing several new products. • Atul Auto commenced its commercial production from July 1992 and the present installed capacity is 48000 vehicles from April 2013. • The company has improved its market position in the domestic 3-wheeler industry with growing incremental market share in the goods and passenger segment in the 0.5 Tonne segment.

Strong Track Record


Products


• Atul Auto has consistently increased its Product profile with the addition of several new products. • The company also has been able to work across different Fuel segments including Petrol, Diesel and LPG for its various products. • Atul Auto’s products are generally lighter and gives better Fuel Mileage compared to competitors. • All products of Atul Auto are currently fitted with engines manufactured by Greaves Cotton which lends strong credibility to the product. • Company provides customized vehicles like tippers, hydraulic hoppers, vegetable vending vans etc. The vehicles find wide application in courier services, industrial products, laundry construction, dairies, caterers, FMCG distribution, &LPG distribution.

Competitive Strength


• Atul Auto is the only player in the three wheeler industry with standalone focus on this segment as compared to its rivals who are more focused on other segments. This helps the company to establish a unique identity for itself apart from bringing new products to the market due to its focus on a single segment. • The company products give a higher mileage ,lower cost apart from a 2 year warranty not offered by any of its competitors. • The company has introduced new vehicles in the CNG and LPG segment which have a strong demand in the market and are likely to be the future growth driver for the industry.

Growing Brands


• Majority of company’s three wheelers are sold under the brand names Atul Shakti, Atul Gem and Atul Smart. • Atul Sakti, Atul Gem and Atul smart (Loading) are suitable for carrying transportation of small volumes of cargo from transit station to main offices and vice versa. Unique features of the vehicle include auto ignition start, fuel efficiency etc. • Company has introduced different types of vehicle to cater to the specific demand of the customers like Pack Body Vehicles, Soft Drink Carrier, High Deck, Chicken Carrier, Hydraulic Tipper, Ice – Cream shop, Hopper, Water tank carrier and Open Box type body. • Atul Sakti, Atul Gem and Atul smart (Passenger)has an approved capacity to carry 3 passengers (excluding driver) or in terms of pay load capacity it can carry 500 kgs while Gemini-Dz can carry 253 kgs.

Distribution Reach


• Company has about 150 dealers with presence in 16 states and this is likely to increase as the company has planned to enter into new geographies. • The Company has recently signed an agreement to assemble three-wheelers in Sri Lanka, which would help bypass high import duty rates. • Company plans to enter new locations like Bihar, Jharkhand, Orissa, Karnataka, Punjab, Haryana and Tamil Nadu etc. From the current presence in 16 states, the company aims to be present in 20 states . • Company has plans to enter the overseas markets and is looking for exports to key markets like Bangladesh, Middle East & Africa.

Investment Rationale


Key Highlights

In a Market where over 3 Lakh vehicles are sold in 3-Wheeler segment, the

scope for Atul growth is Huge.

With a decent Product profile and Focused strategy, market beating

growth should not be difficult.

Growth Opportunity

With Volumes growing, we believe that EBIDTA Margins can

inch up slowly to over 13% considering Economies of Scale

and subdued Commodity prices.

Margin Expansion

The company’s current “S” shaped growth is a result of its RE product

launch in 2009. We believe that with a new set of products in the 0.35 Tonne market, the company can

again move into a different Growth orbit going forward.

“S” Shaped Growth

Atul Auto generates Solid Cash flows which allows it to expand

using Internal Accruals without any stress for Working Capital or Long

Term borrowings.

Cash generating Business

Considering that the Stock is quoting

at less than 4.5X Cash flow from operations of 2013, the stock is definitely cheap allowing both

Earnings Growth + P/E Re-rating.

Attractive Price

Atul Auto


Huge scope for Revenue , EBITDA & PAT Growth


• Atul Auto revenues have been growing strongly over the years and we expect this growth to continue on the back of improved capacity utilization and expanded capacity apart from expansion in distribution network across the country. • The company recorded EBITDA of Rs.28 Cr and Rs.40 Cr in FY12 & FY13 respectively and is likely to be around Rs.45 Cr and Rs.50 Cr in FY14 and FY15 respectively. • The company reported PAT (in Crs) of Rs.16 and Rs.26 for FY12 and FY13 respectively and this is likely to grow to about Rs.29 and Rs.32 in FY14 and FY15 respectively.

Market Share Growth


• Atul Auto has been consistently increasing its market share over the years due to its increase in capacity and expanding operations in new geographies. • Also dealership addition which helps in increasing the penetration of its products helps in growing its Market share across different regions. • The company has increased its market share in the passenger segment from 3.72% in 2012-13 to about 4.44% in 2013-14. • The company ‘s market share in the cargo segment has remained flat from 15.90% in 2012-13 to about 15.75% in 2013-14. Company’s market share growth in the segment has grown 10x over the years from a very low base.

Strong Financials


• Company has a strong Cash generating ability which can be seen in its Working Capital movements. The company has earned over 50 Cr last year before tax. • Atul’s Margins has been slowly improving over the last few Quarters and we expect the Trend to continue.

Improving Cash Flows

• Atul Auto has a good positive cash flow which reflects its strength of its core business.

• Atul Auto derives a major part of its cash flows from cash from operations which underlines the robust cash flow generation potential of the business.

• Atul Auto’s Free Cash Flow per share in FY12 & FY13 was Rs.8 and Rs.33.8 respectively. We expect Free Cash Flow per share of Rs.41.8 and Rs.54.3 for FY14 and FY15 respectively. • This Cash flow will help the company to fund its plans for growing the Business.

Specialists in discovering Multibagger stocks “

Cash Flow Statement

Y/E March (Rs cr) FY2012 FY2013 FY2014E FY2015E

Profit before tax 23 37 42 46

Depreciation 4 4 5 6

Change in Working Capital -2 -8 -11 -9

Interest / Dividend (Net) 0 0 0 0

Direct taxes paid -7 -11 -13 -14

Others 0 0 0 0

Cash Flow from Operations 18 22 23 29

(Inc.)/ Dec. in Fixed Assets -6 -10 -12 -12

(Inc.)/ Dec. in Investments -7 0 0 0

Cash Flow from Investing -12 -10 -12 -12

Issue of Equity 4 4 - -

Inc./(Dec.) in loans 1 13 0 0

Dividend Paid (Incl. Tax) -3 -3 -3 -3

Interest / Dividend (Net) 0 0 0 0

Cash Flow from Financing 2 14 -3 -3

Inc./(Dec.) in Cash 9 27 9 15

Opening Cash balances 3 11 38 47

Closing Cash balances 11 38 47 61

Good and Capable Management


• The company has a good and capable management apart from experience of the promoter family in the auto business for about 35 years. • The company has inducted fresh blood with young and dynamic N.J.Chandra now looking after the operations of the company. He was the person responsible for turnaround in the fortunes of the company which resulted in the company gaining market share and increase in capacity expansion thereby driving growth. This gives us more confidence about the future. • Apart from the above two the company ‘s Independent director is V.K.Kedia who has about 25 years of experience in finance and is one of the smartest Investors in Dalal street.

Financials


Earnings Projection

• Atul Auto revenues have grown at about 20%+ CAGR over the past five years and we expect revenues growth to be about 19.3% and 16.9% in FY14 and FY15 respectively.

• Atul Auto ‘s EBITDA margins have been around 10% and we expect the EBITDA margins to slowly improve going forward.

• Atul Auto reported PAT margins of about 5.2% and 7.1% in FY12 and FY13 respectively and is likely to be around 6.7% and 6.3% in FY14 and FY15 respectively. • These are highly conservative estimates with a lot of scope to be revised upwards.

Specialists in discovering Multibagger stocks “

Profit & Loss Statement

Y/E March (Rs Cr) FY2012 FY2013 FY2014E FY2015E

Net Sales 299 364 434 507 % chg 47.9 21.8 19.3 16.9 Total Expenditure 271 324 389 457 Cost of Materials 238 284 340 398 Personnel Expenses 16 21 25 30 Other Expenses 17 19 24 29 EBITDA 28 40 45 50 % chg 41.7 45.5 12.1 11.2 (% of Net Sales) 9.2 11 10.4 9.8 Depre. & Amortisation 4 4 5 6 EBIT 23 36 40 44 % chg 53.3 53.1 11.2 9.9 (% of Net Sales) 7.8 9.8 9.1 8.6 Interest & other 1 0 0 0 Other Income 1 2 2 3 PBT (reported) 23 37 42 46 Tax 8 11 13 14 PAT (reported) 16 26 29 32 % chg 65.1 66.3 11.4 10.6 (% of Net Sales) 5.2 7.1 6.7 6.3 Fully Diluted EPS(Rs) 13.9 23.1 25.8 28.5 % chg 65.1 66.3 11.4 10.6

Concerns & Reasoning


2.) Dependence on a single segment :

The company is dependent on a single segment namely three wheelers which are highly susceptible to changes in GDP growth rates. Any slow down in the economy will eventually lead to poor demand for the segment which will result in weakness in top-line and bottom-line growth. 3.) Intense Competition from Bigger Players:

Atul Auto is present in an industry which has leading players like Bajaj Auto , Piaggio etc who have higher market reach and brand apart from strong distribution network across the length and breadth of the country. Atul Auto was till recently confined to a single state namely Gujarat and is expanding its network which may or may not be as envisaged by the company.

1.) Increasing Cannibalization :

The 4W-SCV’s have taken significant Market share and we don’t expect them to gain. But still the Risk remains considering the deep pockets of many of these 4W-SCV manufacturers.

Conclusion


Price Chart

• Atul Auto has been on a strong Upside over the last few years. In fact the stock has doubled itself over the last 1 year when all Small cap stocks have been battered.

• The Stock is on a strong Technical footing with Higher Highs and Lower Lows, there by indicating more steam left in its Bull run. • Institutional Interest has still not picked up in the share and this can provide further boost to the share price as people enter it over a period of time.


Share Holding %

Mar 2013

Dec 2012

Sep 2012

Jun 2012

Promoters 56.62 56.62 56.62 60.81

FII 0.11 - - -

DII - - - -

Others 43.27 43.38 43.38 39.19

Conclusion

This is a surprising pick at a time when most Small cap stocks are getting beaten down heavily. But we believe that, Market conditions like these separates the Chaff from the Wheat and makes our job easier. In spite of being a Small Cap company in a cyclical sector, we believe that the company has shown tremendous resilience in its performance.

While the company has a bad track record in the early part of 2000’s, we believe that the company has improved structurally with changes in Management and a more robust Product portfolio. With an aggressive team and so many low hanging fruits, we believe that the company would be able to maintain its Growth momentum and can accelerate with supporting Macro conditions. Company has also been launching new products and with increased Capacity and Dealer network, we expect an all round improvement in Margins, Market Share, Revenues, Profitability etc. With a Management which is Transparent and a Balance sheet which is strong, the company doesn’t suffer from the problems usually associated Small-cap stocks.

At the current Valuations of less than 4.5X Cash flow from Operations, <4X EV/ EBIDTA multiple and around 8X trailing EPS – its definitely attractive for a long term Investor. This allows for both Earnings growth and Valuations expansion, potentially giving Multibagger returns. In spite of all these positives, Investors should not take a big bet (>5% of Portfolio) considering the Inherent Risks and other High conviction mouth watering stocks which are available.


TMP – Your model Portfolio for wealth creation

Spend no more than 30 Minutes/

Month to keep your Portfolio healthy.

Grow your Wealth by compounding

your Investments at a Healthy Rate

consistently

Unable to Manage you Equity Portfolio effectively ??

Subscribe to the Best Offline PMS Service, “The Millionaire Portfolio” today !!

THANK YOU


Atulauto Hbjcapital 131120103110 Phpapp01

Documents

Transcript of Atulauto Hbjcapital 131120103110 Phpapp01