Atul Auto (ATUAUT) 500

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1 Company Update Rating matrix Rating : Hold Target : 505 Target Period : 12 months Potential Upside : 1% What s changed? Target Changed from 620 to 505 EPS FY17E Changed from 27.3 to 24.5 EPS FY18E Changed from 34 to 29.7 Rating Changed from Buy to Hold Quarterly performance ( Crore) Q4FY16 Q4FY15 YoY (%) Q3FY16 QoQ (%) Revenues EBITDA EBITDAM (%) bps bps PAT Key financials Crore FY15 FY16E FY17E FY18E Net Sales EBITDA Net Profit EPS ( ) Valuation summary FY15 FY16E FY17E FY18E P/E (x) Target P/E (x) EV/EBITDA (x) P/BV (x) RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization ( Crore) 1097 Crore Total Debt (FY15E) ( Crore) 0 Crore Cash & Investments (FY15E) ( Crore) 12.7 Crore EV ( Crore) Crore 52 week H/L ( ) 581 / 371 Equity capital ( crore) 11 Crore Face value ( ) 5 Price performance 1M 3M 6M 12M Atul Auto Ltd Bajaj Auto Ltd TVS Motor Company Ltd Research Analyst Nishit Zota nishit.zota@icicisecurities.com Vidrum Mehta vidrum.mehta@icicisecurities.com Demand recovery key to growth! June 15, 2016 Atul Auto (ATUAUT) 500 Atul Auto s Q4FY16 revenues were at 130 crore, up 5.9% YoY (volume up 2.5% YoY to 10,251 units) vs. our estimate of 128 crore EBITDA margins contracted 321 bps QoQ to 13.4% vs. estimate of 15.1% largely on the back of higher other expense, up 205 bps QoQ to 7.6%. Also, higher raw material cost (up 52 bps QoQ) & employee expense (up 64 bps QoQ) impacted margins. PAT was at 10.9 crore (up 25.7% YoY) vs. our estimate of 12.2 crore The management has clarified that the tax issue has been sorted out in Gujarat and volumes are likely to normalise, going forward. However, we believe the damage has largely done for Q1FY17E in the middle of a sluggish demand (both domestic & export) scenario Further, we believe margins are likely to flatten out as the benefit of higher ASPs & product mix would largely be offset by higher raw material cost, going forward. Hence, we cut our earnings estimates and multiple Domestic environment remains challenging amid stiff competition Atul Auto s growth trajectory has been impressive with volumes growing at ~29% CAGR in FY09-16 even as the domestic three-wheeler (3-W) segment has grown at ~6% CAGR in the same period. However, in the last two years, the company s growth has largely moderated (for FY15 & FY16 domestic volumes grew 8% & 6%, respectively), mainly attributable to lower rural demand (due to lower monsoons). Despite expectations of better monsoon in 2016, higher volume growth would remain a key challenge mainly due to intensifying competition (market leader Bajaj Auto has entered the 3-W goods space). In the current fiscal, tax issue in Gujarat & BAL entry in 3-W goods has led to a decline in AAL s market share by ~700 bps to 13.5%. Thus, we expect domestic volume growth of 6%, 11% to 44,902 units, 46,939 units for FY17E, FY18E, respectively. Double whammy = Delayed launch of vehicle + sluggish export market AAL took more time for testing and approval for the launch of its new petrol vehicle (largely to cater the export market) thereby delaying the launch of the product by eight to 12 months. Further, when the product was launched, the 3-W export market was and continues to face a downturn due to lower availability of dollar and currency depreciation in exporting nations. For FY16, industry volumes of 3-W exports declined 0.8% YoY to 404,441 units. We believe the near term challenge in terms of export market is likely to persist. It would be a key challenge for AAL to grab market share of well established players. Thus, the delay in launch of its new petrol vehicle & challenging time in export market would consequently impact its export volumes in the near term. Thus, we expect flattish export volume for FY17E to 1,527 units. Demand moderating while margins seem to have peaked out! Atul s specialised focus has clearly paid rich dividends as evidenced by market share gains in the past. However, currently, we believe AAL being a small player would face key challenges in both domestic and export market amid stiff competition in the 3-W space (with BAL entering the goods segment). Capacity addition in a subdued environment may result in higher overheads cost along with raw material prices, which seems to have peaked out. This would largely offset the benefit of higher ASPs and better product mix leaving lower scope for margin expansion. Thus, we cut our estimates & multiple. Hence, we revise our target price downward to 505, (valuing 17x its FY18E EPS) with a HOLD rating on the stock. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q4FY16 Q4FY16E Q4FY15 YoY (%) Q3FY16 QoQ (%) Comments Total Operating Income Performance marginally above our estimates; due to higher ASPs Raw Material Expenses Employee Expenses Other expenses Higher other expense; we believe this could probably be one-off EBITDA EBITDA Margin (%) bps bps Higher raw material & other expense impacted margins QoQ Other Income Depreciation Interest Tax Reported PAT Lower-than-expected margins impacted profitability EPS Key Metrics ASPs ( '000s) 122, , , , Continued rise in ASPs RM/Unit ( '000s) 88,851 86,520 89, , Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Comments Revenue Q1FY17E was largely impacted by a change in tax structure (though now it has been rolled back by the Gujarat government) in the middle of an overall weak demand scenario impacting its topline EBITDA EBITDA Margin (%) bps bps With most raw material prices starting to move northwards, we have lowered our margin estimate PAT Lower volumes & margins to impact PAT EPS ( ) Assumptions Current Earlier Comments FY15 FY16E FY17E FY18E FY17E FY18E Domestic volumes 40,134 42,361 44,902 49,639 46,728 53,230 The changes in tax structure (though now rolled back) by the Gujarat government, largely impacted Q1FY17 in the middle of clear signs of a demand recovery Export volumes 1,464 1,532 1,527 2,031 3,200 4,673 Slowdown in overall global environemnt likely to impact its export market Avg Realization/vehicle ( ) 117, , , , , ,418 Better product mix to result in higher ASPs RM/vehicle ( ) 89,475 87,684 91,490 94,520 89,949 92,879 Raw material prices have primarily given signs of moving upwards EBITDA/vehicle ( ) 13,924 17,376 17,929 18,766 17,545 18,876 ICICI Securities Ltd Retail Equity Research Page 2

3 Key conference call takeaways The management expects double digit volume growth for FY17E. Volumes are likely to remain subdued in H1FY17E and are expected to pick up from H2FY17E onwards. On the EBITDA margin front, the management expects bps of margins expansion on a yearly basis The management has clarified that an increase in VAT (from 15% to 20%) at dealer level by Gujarat government earlier has been rolled backed now. Hence, volumes that were impacted in April 2016 (down 50.4% to 1,242 units) would gradually normalise, going forward According to the management, the 3-W industry, similar to other auto segments, would also move to BS IV norms from April The quantum of the price hike is yet unknown. However, the same is expected to be seen in H2FY17E For FY16, AAL sold 43,893 units with overall production capacity of 60,000 units taking the utilisation level to 73%. Export volumes and revenue accounted for ~3% of total revenues. Overall margins for FY16 expanded 263 bps to 14.4% mainly on account of lower commodity price and operational efficiency. AAL has 200 primary dealers, 120 secondary dealers and eight overseas distributors The company has a pan-india presence (except in Tamil Nadu & West Bengal). According to the management, AAL is largely penetrated in western and northern regions of India while it has a lower presence in South India ICICI Securities Ltd Retail Equity Research Page 3

4 Company Analysis Revenues continue to grow as volumes remain on uptrend Atul Auto is the only pure play 3-W manufacturer in India. With ~21% 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. We expect volumes to remain on the uptrend though the pace is likely to soften due to a sluggish demand scenario and stiff competition. The petrol engine variant launched in the export has, however, received good consumer feedback. However, it is expected to penetrate gradually, going forward. Thus, we build in revenue growth at ~12% CAGR in FY16-18E with volume growth of ~8% in the same period. Exhibit 1: Revenue growth driven largely by volume growth ( crore) (%) 100 FY13 FY14 FY15 FY16E FY17E FY18E Net Sales Growth (%) - Exhibit 2: Passenger carrier segment volume break-up 800,000 (units) 700, , , , , , , FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Domestic Exports Exhibit 3: Goods carrier segment volume breakup (units) 120, ,000 80,000 60,000 40,000 20, FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Domestic Exports ICICI Securities Ltd Retail Equity Research Page 4

5 Atul s main forte has been rural markets, especially the large diesel segment, which is a ~2.5-3 lakh strong market. The company has a significant market share in the goods carrier segment in which it is a strong player. The increase in dealerships across the country could propel faster volume growth Exhibit 4: Segmental volumes dominated by goods carrier segment 50,000 40,000 (units) 30,000 20,000 10, FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Passenger Carriers Goods Carriers Atul s market share has grown in its target market across the years. It is interesting to note that Atul earlier was only able to target ~60% of the domestic market due to the absence of a petrol variant. The entry into petrol segment, increasing capacity and footprint could lead to faster growth in market share in the coming years Exhibit 5: Atul market share movement over the years in domestic market (%) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY (%) Passenger Carriers Goods Carriers ICICI Securities Ltd Retail Equity Research Page 5

6 EBITDA margins to stabilise at current levels Despite continued volume growth, we believe EBITDA margins are likely to stabilise, going forward. This is after the capacity addition (phase one of 30,000 units likely to commence in FY18E) in a subdued environment may result in higher overheads cost along with raw material prices, which seems to have peaked, is likely to drag the overall profitability. On the other hand, benefit of higher ASPs and better product mix would cushion margins, which are expected to stabilise going forward. Thus, we expect margins to remain at ~14.5% over the next two years. Exhibit 6: Margins trends and forecasts ( crore) (%) 9 0 FY13 FY14 FY15 FY16E FY17E FY18E EBITDA EBITDA Margin (%) 8 Atul is expected to witness a product mix improvement Exhibit 7: Net ASPs to trend higher as product/geography mix improves 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 150, , , , ,834 ( ) 130, , , , , , ,000 FY12 FY13 FY14 FY15 FY16 FY17E FY18E ASPs ( ) ICICI Securities Ltd Retail Equity Research Page 6

7 Profitability to improve! Profitability is likely to remain on an uptrend as the management focus on growing profitably remains intact. With increasing volumes and stabilised margins, profitability is likely to remain on an uptrend. We expect PAT to increase at ~17% CAGR to 65 crore in FY16-18E. Exhibit 8: Increase in profitability as financial performance improves! ( crore) (%) 0 FY13 FY14 FY15 FY16E FY17E FY18E PAT Growth (%) -100 Capex to be funded by strong CFO generation Atul possesses strong balance sheet strength, with zero debt on the books. For the major capex planned in FY17E, FY18E, the management has guided at meeting the capex need by using existing cash as well as CFOs. We believe that in the next two years, with CFO generation likely to remain robust as the demand scenario improves, Atul s debt-free status is likely to sustain. Exhibit 9: Major capex to be funded by strong CFOs.to retain debt-free status ( crore) FY12 FY13 FY14 FY15 FY16 FY17E FY18E Capex CFO Cash & Equivalents ICICI Securities Ltd Retail Equity Research Page 7

8 Return ratio to moderate albeit to stay at higher level With the planned capex in FY17E, FY18E, return ratios are likely to moderate, going forward. We expect RoE, RoCE to remain above 25%, 35% for FY17E, FY18E, respectively. Exhibit 10: Return ratios to remain buoyant! 60 (%) FY13 FY14 FY15 FY16E FY17E FY18E RoCE RoE ICICI Securities Ltd Retail Equity Research Page 8

9 Outlook & valuation Atul s specialised focus has clearly paid rich dividends as evidenced from market share gains in the past. However, currently, we believe AAL being a small player would face key challenges in both domestic and export market amid stiff competition in the 3-W space (with BAL entering the goods segments). The capacity addition in a subdued environment may result in higher overheads cost along with raw material prices, which seem to have peaked out. This would largely offset the benefit of higher ASPs and better product mix leaving lower scope for margin expansion. Hence, we have cut our estimates & multiple. Hence, we revise our target price downwards to 505, (valuing 17x its FY18E EPS) with a HOLD recommendation on the stock. Exhibit 11: Valuations Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY FY16E FY17E FY18E ICICI Securities Ltd Retail Equity Research Page 9

10 Financial summary Profit and loss statement Crore (Year-end March) FY15 FY16E FY17E FY18E Total Volumes (Units) 41,598 43,893 46,429 51,670 Total operating Income Growth (%) Raw Material Expenses Employee Expenses Other Expenses Total Operating Expenditure EBITDA Growth (%) Depreciation Interest Other Income PBT Others Total Tax PAT Growth (%) EPS ( ) FDEPS ( ) Cash flow statement Crore (Year-end March) FY15 FY16E FY17E FY18E Profit af ter Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend paid & dividend tax Others CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year- end March) FY15 FY16E FY17E FY18E Liabilities Equity Capital Reserve and Surplus Total Shareholders funds Total Debt Deferred Tax Liability Others Total Liabilities Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Investments Inventory Debtors Loans and Advances Other current assets Cash Total Current Assets Creditors Provisions Other current liability Total Current Liabilities Net Current Assets Other non- current assets Application of Funds Key ratios (Year-end March) FY15 FY16E FY17E FY18E Per share data ( ) EPS Cash EPS BV DP S Cash Operating Ratios (%) EBITDA Margin PBT / Net sales PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 10

11 ICICIdirect.com coverage universe (Auto & Auto Ancillary) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Amara Raja (AMARAJ) Hold Apollo Tyre (APOTYR) Hold Ashok Leyland (ASHLEY) Hold Bajaj Auto (BAAUTO) Buy Balkrishna Ind. (BALIND) Hold Bharat Forge (BHAFOR) Hold Bosch (MICO) Buy Eicher Motors (EICMOT) Buy Exide Industries (EXIIND) Buy Hero Mototcorp (HERHON) Hold JK Tyre & Ind (JKIND) Hold M&M (MAHMAH) Buy Mahindra CIE (MAHAUT) Buy Maruti Suzuki (MARUTI) Buy Motherson (MOTSUM) Hold Tata Motors (TELCO) Buy Wabco India (WABTVS) Hold ICICI Securities Ltd Retail Equity Research Page 11

12 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 12

13 ANALYST CERTIFICATION We /I, Nishit Zota, MBA & Vidrum Mehta, MBA Research Analyst, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited is a Sebi registered Research Analyst having registration no. INH ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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ICICI Securities Ltd Retail Equity Research Page 13