Atul Auto Ltd. Initiating Coverage BUY. Drive on the clear way. July 8, Company Snapshot. Investment Rationale. Valuation

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1 Jul-14 Jul-14 Aug-14 Sep-14 Sep-14 Oct-14 Nov-14 Dec-14 Dec-14 Jan-15 Feb-15 Feb-15 Mar-15 Apr-15 Apr-15 May-15 Jun-15 Jun-15 Equity India Automobile Initiating Coverage Atul Auto Ltd. Drive on the clear way. July 8, 2015 BUY CMP (`) Target (`) Potential Upside Absolute Rating 22% BUY Market Info (as on July 08, 2015) BSE Sensex 27, Nifty S&P 8, Company Snapshot Atul Auto Ltd. (Atul Auto) is Gujarat based automobile manufacturing company. The company is mainly involved in the manufacturing and selling of three wheelers commercial vehicles focused mainly domestic rural markets. Atul is famous in the states of Gujarat and Rajasthan for its cost effective and high performance commercial vehicles. Now company has diverse the customer base in the cargo and passenger segment available on the two platforms viz. 350Kg payload capacity and 500Kg payload capacity. Atul auto is one of the fastest growing companies in India in 3 wheeler industry growing with the CAGR of 19.50% in last five years. Stock Detail BSE Group B BSE Code NSE Code ATULAUTO Bloomberg Code ATA IN Market Cap (`bn) Free Float (%) 47% 52wk Hi/Lo 722 / Avg. Daily Volume (NSE) Face Value / Div. per share (`) 5.00 / 2.50 Shares Outstanding (mn) Shareholding Pattern (in %) Promoters FIIs DII Others Financial Snapshot (`mn) Y/E Mar FY13 FY14 FY15E FY16E Net Sales 4,301 4,928 5,756 7,016 EBITDA PAT EPS ROE (%) 32% 34% 32% 29% ROCE (%) 28% 28% 28% 26% P/E EV/EBITDA Share Price Performance Atul Auto Ltd BSE SENSEX Rel. Perf. 1Mth 3 Mths 6Mths 1Yr Atul Auto (%) 14.5 (17.6) (27.4) 72.2 Sensex (%) 5.24 (1.21) Investment Rationale Fast growing industry and favorable economic conditions will provide an edge Indian Auto mobile industry is one of the fastest growing industries in the country. Strong domestic market creates greater opportunities for such players. 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. 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. Strong distribution and dealer network makes more robust business structure 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. Healthy balance sheet and return ratios 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 FY12 to 12% in FY15 in the span of three year. Whereas operating margins has grown from 8% in FY12 to 12% in FY15. The company has strong ROE which makes company more lucrative. ROE for FY 12 stood at 22% which has grown to 34% in FY15. The ROCE of the company has also grown from 19.8%in FY12 to 28.3% in FY15. This creates a great investment opportunity for the investor. Valuation At the CMP of `462, Atul Auto Ltd. is trading at 25.09x, and 18.9x its FY16E, and FY17E EPS of `22.4 and `25.8 respectively. Compared to its peers; Atul auto trading at a discount P/E multiple, although its margins are better than or comparable to peers. We initiate coverage on Atul Auto Ltd with a BUY rating and attach a multiple of 25.1 xs to Atul Autos FY16E earnings (EPS) to arrive at the target price of `562, indicating a potential upside of 22%. Analyst Omkar Tanksale omkar@geplcapital.com Institutional Research 1

2 Index & Content Sr. No. Topic Page No. 1 Company Background Business Model Key Management Personnel Investment Rationale Three Wheeler Industry at a glance Financial Overview Key Risks SWOT Analysis Valuation & Outlook Financials Disclaimer Institutional Research Initiating Coverage 2

3 Company Background 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 It has well diversified product portfolio of 45 models and variants, an extremely strong brand, integrated manufacturing plant and presence across key regions, Atul Auto is today the fastest growing 3 wheeler player in India, growing at 19.5% for last 5 years, having installed capacity of 48,000 units per annum at Rajkot Plant. It not only caters to diverse customer base in the Cargo & Passenger segment but also available on both the platforms i.e. 350 kgs payload capacity and 500 kgs payload capacity. Atul auto is the inventor of the most popular rural transport vehicle Chakkada. Journey of Atul Auto Company incorporated as a private ltd company in 1986 in Maharashtra, its registered office was shifted to Jamnagar Gujarat in 1992 & then to Rajkot in Company went public in March 1996 It has been awarded with Most Promising SME in Auto & Engineering Co by CNBC TV-18 in It has also awarded with Leaders of tomorrow Award 2013 by ET Now. Origin Lie in the 1970 s when Mr. J Chandra sought to modify motorcycles to make transport to make needs of rural areas of Saurashtra. Integrated plant located in Shapar in Rajkot District of Gujarat. It has installed capacity of vehicles p.a. Today, it has market presence in 16 states with 200 primary dealers & 120 secondary dealers Source: Company, Institutional Research Institutional Research Initiating Coverage 3

4 Business Model Atul Auto is one of the youngest players in the 3 wheeler business. Initially, company started its operation with manufacturing of Chhakadas (Rural Transport Vehicle (RTV)), customized multipurpose vehicles for Saurashtra region in Gujarat. However since year 2000, company has been successful in launching new products in three-wheeler segment. In 2009, company launched rear engine 3W & thus mark a real reflection point for itself. It currently offers cargo & passenger variant (diesel engine powered) on 350kg & 500kg. It has current production capacity of units per annum in Rajkot, Gujarat & expected to increase to units per annum in next 2 years. Recently, it has introduced gasoline/alternate fuel for 3Ws. 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. Consistent product development Source: Company, Institutional Research Institutional Research Initiating Coverage 4

5 Key Management Personnel Atul Auto is blessed with rich experience of sound management that takes company on a successful path. Mr. Jayantibhai J Chandra (Executive Chairman & managing Director ): Mr. Chandra is responsible for the product development and creating goodwill for the company. He focuses on the medium- to long-term future of the company. He is also involved in leadership development and corporate social responsibility. Mr. Mahendra J Patel (Director and CFO): He is responsible for the major financial decisions and managing the money efficiently for the company. Mr. Patel is also serves as a executive director of the company. Mr. Niraj J Chandra (President, Corporate Affairs & Infrastructure): He is the first generation entrepreneur of the company taking the company on new growth path of the company. He is responsible for creating brand and product development of the company. Mr. Vijay K Kedia (Director): Mr. Kedia is serves as the executive director of the company. Institutional Research Initiating Coverage 5

6 Investment Rationale Fast growing industry and favorable economic conditions will provide an edge Indian automobile industry is one of the fastest growing industries. Strong domestic market makes industry more robust and lucrative. Strong initiatives taken by central government like rural transport and infrastructure development will help to boost the volumes. 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. Market Share (3W) Domestic FY15 - Cargo Market Share (3W) Domestic FY15 - Passenger SIL, 6% SIL, 1% AAL, 5% AAL, 18% PVPL, 27% PVPL, 53% BAL, 0% M&M, 23% Market Share (3W) Domestic FY15 - Total Domestic Industry M&M, 8% BAL, 54% TVS, 3% SIL, 2% AAL, 8% PVPL, 32% M&M, 11% BAL, 44% Institutional Research Initiating Coverage 6

7 Strong distribution and dealer network makes more robust business 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. Distributing Network across India Source: Company, Institutional Research 17 Regional Offices 3 Training Centers 200 Primary Dealership 120 Secondary Dealership Overseas Presence Bangladesh Tanzania Kenya South Africa Nigeria Jamaica Institutional Research Initiating Coverage 7

8 Q1FY11 Q2FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Equity India Automobile Strong volume growth backed by low cost product help to boost sales Atul auto has high volume growth in the past few years. The company has posted 22% CAGR in last 5 years. Gujarat and Rajasthan regions are predominantly responsible for the most of the sales. Industrialization and urbanization in the Gujarat help company to boost its volume growth. However now company has started expanding its footprints across the country which will also help company to maintain its growth momentum. Volume growth 125, , , , , ,000 95,000 90,000 85,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - Avg Realization No of Vehicle Sold ( numbers) Source: Company, Institutional Research The above chart shows that the company has consistent sales in terms of volumes over the period of time. The consistent volume growth makes Atul auto more lucrative. Average realization also shown the upward trend indicates the rising pricing power of the company. This also shows that the company has the strong foundation in the business. Robust product profile creates a great business opportunity for the business. We believe that Atul auto continue its volume growth in the upcoming period. Institutional Research Initiating Coverage 8

9 High expansion plans will boost the volumes Atul auto s management has taken strong initiatives to grow its business. The company has doubled its capacity to 48,000 units annually at its only manufacturing plant at Rajkot Rajashtan. By the end of this fiscal FY16 company has also decide to ramp up the capacity to 60,000 units annually at the current manufacturing plant. The company has also plan to build a new plant in the Gujarat with the doubling the capacity to 120,000 units per year. This higher expansion plans will not increase the debt burden as total inflow of Rs.100mn to Rs.150 mn will be used from the reserves. So the company will likely to remain debt free or there will be marginal debt on its balance sheet. Manufacturing Capacity 60,000 50,000 40,000 30,000 20,000 10,000 0 FY11 FY12 FY13 FY14 FY15 Capacity Sales Source: Company, Institutional Research Institutional Research Initiating Coverage 9

10 Three Wheeler Industry In India Three wheeler Industry a great opportunity 3Ws are widely used in India as an affordable means of short-to-medium distance public transportation and last mile connectivity for goods transportation. Three wheelers segment constitute only 3 % of total automotive industry. India is one of the largest manufacturers of three wheelers in the world with a production of 950,000 units annually in FY15. Of these, almost 530,000 units are sold in the domestic market, with exports comprising the balance 420,000 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, threewheelers are proving emerging as a popular alternative for both personal and mass transportation needs. 3-wheeler products available with alternative fuel like CNG & LPG and thus its operating cost is moderate. Apart from the domestic demand, India has also emerged as important export hub for 3Ws with presence in some of the countries like Bangladesh, Sri Lanka, Indonesia, African and Latin American countries. India export 99% of passenger segment 3- wheelers to other nations & only 1% of cargo segment. Atul has rising market share will help to grow the business. We believe that Atul auto will improve with the CAGR of 15-17% in the next 5 years. Industry At a Glance (Domestic 57%) 5,31,927 unit Application Fuel-type Tonnage Paxx 81% Cargo 19% Alternative 34% Diesel 66% 0.5 Tonne 47% 0.35 Tonne 53% Industry At a Glance (Export 43%) 4,07,957 unit Application Fuel-type Tonnage Paxx 99% Cargo 1% Alternative 93% Diesel 7% 0.5 Tonne 6% 0.35 Tonne 94% Institutional Research Initiating Coverage 10

11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Equity India Automobile Financial Overview Pretax Margin EBITDA Margins As shown in the chart below, Atul auto has consistent growing EBITDA over the period of time. There is a marginal decline of the EBITDA in the 1QFY15 but regain the momentum in the upward direction. We also can see from the above chart that EBIDTA margin are stable over the period of time. This shows the operational efficiency is maintain or increasing even if the input cost is rising. EBITDA Margins % 12% 10% 8% 6% 4% 2% 0% EBITDA EBIDA margin Operating Margins The chart below shows EBIT and EBIT margin in last 3 years. Operating margins are maintained over the period of time. Instead we can see that it is being growing from last few quarters. This shows that operational efficiency is improving. This makes business more robust and promising over the longer run horizon. Operating Margins % 14% 12% 10% 8% 6% 4% 2% 0% EBIT EBIT Margin Institutional Research Initiating Coverage 11

12 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Equity India Automobile Net Profit Margin As we can see from the chart below, PAT is increasing with the higher growth rate and margins are also improving. Rising NPAT margins shows the lesser debt burden on the companies shoulder. We believe that the in the upcoming period the growth momentum will likely to continue. NPAT Margin % % 80 8% 60 6% 40 4% 20 2% 0 0% NPAT ( Calculated) NPAT Margin Return Margin ROE performance The Return on equity is increasing at the smoother pace. However some capital expenditure in FY14 will impact negatively on the growth momentum but we believe that the ROE will likely to maintain the momentum. RoE FY11 FY12 FY13 FY14 FY15 40% 35% 30% 25% 20% 15% 10% 5% 0% Net Profit ROE Institutional Research Initiating Coverage 12

13 Return on the capital Employed (ROCE) Return on capital employed (ROCE) have maintained the growth momentum. Lower debt burden help to maintain the ROCE over the period of time. The ratio has also maintain the synchronous movement with the movements in the net profit. This shows that invested capital can optimize the net profit. We believe that in the upcoming period the growth momentum likely to continue. RoCE FY11 FY12 FY13 FY14 FY15 35% 30% 25% 20% 15% 10% 5% 0% Net Profit RoCE Net Profit to Payout Ratio Atul auto has history of paying dividend to its share holder. As shown in the diagram below we can see that company had given consistent dividends as proportion to the net profit. We believe that payout ratio to net profit ratio will likely to remain same. This also makes stock more lucrative. Investor can also take privilege of higher payout ratio. Net Profit to Payout Ratio FY11 FY12 FY13 FY14 FY15 120% 100% 80% 60% 40% 20% 0% Net Profit Payout Ratio Institutional Research Initiating Coverage 13

14 Key Risks Investment Risk : Increase in the lending rates (interest rates) will make vehicles expensive which may cause lower demand. Increase in the fuel price will also affect the demand adversely on the automotive segment. Rise in the prices of the key raw materials like iron, steel, aluminum will impact the margins negatively. Entry of the big players like Mahindra & Mahindra, Tata Motors and Bajaj Auto into three wheeler segment may cause the market share to reduce. Institutional Research Initiating Coverage 14

15 SWOT Analysis Strengths Strong domain focus Diversification of business. High rural penetration Opportunities Further penetration in rural markets Mining the existing and the new clients Atul Auto Ltd. Weaknesses Single domain dependence. lagging geographical diversification Threats Slowdown economy Rising Lending rates Entry of the strong player Source: Institutional Research Institutional Research Initiating Coverage 15

16 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Equity India Automobile Valuation & Outlook At the CMP of `462, Atul Auto Ltd. is trading at 25.09x, and 18.9x its FY16E, and FY17E EPS of `22.4 and `25.8 respectively. Compared to its peers; Atul auto trading at a discount P/E multiple, although its margins are better than or comparable to peers. We initiate coverage on Atul Auto Ltd with a BUY rating and attach a multiple of 25.1xs to Atul Autos FY16E earnings (EPS) to arrive at the target price of `562, indicating a potential upside of 22%. 1 year forward P/E Chart 1,600 1,400 1,200 1, Close -Unit Curr 10.0 X 15.0 X 20.0 X 25.0 X 30.0 X Source: Capitaline, Institutional Research 1 year forward P/ BV Chart Close -Unit Curr 4.0 X 6.0 X 8.0 X 10.0 X 12.0 X Source: Capitaline, Institutional Research Institutional Research Initiating Coverage 16

17 Income Statement Y/E Mar (`mn) FY13 FY14 FY15 FY16E FY17E Net revenues 3,638 4,301 4,928 5,756 7,016 Raw material cost 3,238 3,848 4,349 5,013 6,129 EBITDA EBITDA Margin (%) 11% 11% 12% 13% 13% Depreciation Other Income Interest (Net) Exceptional Items - - (17) - - PBT PBT Margin (%) 10% 10% 12% 13% 12% Tax Reported PAT Key Ratio Y/E Mar (`mn) FY13 FY14 FY15 FY16E FY17E Per Share Ratios Fully diluted E P S Book Value Dividend per share Valuation Ratio P/E P/BV EV/EBITDA EV/Sales Growth Ratios Sales Growth 22% 18% 14% 17% 22% EBITDA Growth 45% 13% 28% 28% 19% Net Profit Growth 66% 15% 36% 22% 15% Common size Ratios EBITDA Margin 11% 11% 12% 13% 13% EBIT margin 10% 9% 11% 12% 11% PAT margin 7% 7% 8% 9% 8% Return ratios RoNW 35% 32% 34% 32% 29% RoCE 31% 28% 28% 28% 26% Turnover ratios (days) Debtors ( Days) Creditors ( Days) Inventory (Days) Solvency Ratios Total Debt/Equity 6% 7% 5% 3% 3% Balance Sheet Y/E Mar (`mn) FY13 FY14 FY15 FY16E FY17E Equity capital Reserves & Surplus Net worth Total debt Deferred Tax Liability Total Liabilities & Equity 790 1,009 1,268 1,610 2,012 Net block Investments Long Term Loans & Adv Other Non Current Assets Total Non-Current Assets ,049 1,199 Debtors Cash & bank Loans & advances Other Current Assets Total Current Assets ,073 1,399 Creditors Provisions Current Liab. & Prov Total Assets 790 1,009 1,268 1,610 2,012 Cash Flow Y/E Mar (`mn) FY13 FY14 FY15 FY16E FY17E PBT Add: Depreciation Chg. in working capital (170) (33) 49 Taxes paid CF from operations Capex Purchase of investment 0 0 (2) 0 0 Other Adjustments (7) CF from Investing acti Share application money (77) (96) (140) (144) (166) Debt Charges (26) 17 (7) (7) 0 Other changes (139) (232) (686) (477) (472) CF from Financing acti. (243) (311) (833) (629) (638) Chg. in cash (178) Opening cash Closing cash Du-Pont Analysis (%) FY13 FY14 FY15 FY16E FY17E PAT/ PBT 70% 70% 68% 68% 66% PBT/ PBIT 99% 99% 102% 99% 99% PBIT/ sales 10% 10% 12% 13% 12% Sales/ Assets 295% 297% 276% 270% 269% Assets /Equity 166% 153% 147% 136% 132% ROE 35% 32% 34% 32% 29% Institutional Research Initiating Coverage 17

18 NOTES Recommendation Rationale Recommendation Expected Absolute Return (%) over 12 months BUY >15% ACCUMULATE <10% and >15% NEUTRAL <-10% and <10% REDUCE >-10% and <-20% SELL >-10 Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a 12-month horizon. Our target price represents the fair value of the stock based upon the analyst s discretion. We note that future price fluctuations could lead to a temporary mismatch between upside/downside for stock and our recommendation. GEPL CAPITAL Pvt Ltd Reg Office: D-21 Dhanraj mahal, CSM Marg, Colaba, Mumbai Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Name : Omkar Tanksale Sector : Automobile Disclaimer: This report has been prepared by GEPL Capital Private Limited ("GEPL Capital "). GEPL Capital is regulated by the Securities and Exchange Board of India. This report does not constitute a prospectus, offering circular or offering memorandum and is not an offer or invitation to buy or sell any securities, nor shall part, or all, of this presentation form the basis of, or be relied on in connection with, any contract or investment decision in relation to any securities. 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GEPL Capital specifically prohibits the redistribution of this material in whole or in part without the written permission of GEPL Capital and GEPL Capital accepts no liability whatsoever for the actions of third parties in this regard. Institutional Research Initiating Coverage 18