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1 April 7, 2016 Atul Auto Ltd. No. of shares (m) 21.9 Mkt cap (Rs crs/$m) 1116/167.7 Current price (Rs/$) 509/7.6 Price target (Rs/$) 561/ W H/L (Rs.) 635/330 /9.1 Book Value (Rs/$) 71.8/1.1 Beta 1.1 Daily volume (avg. monthly) P/BV (FY16e/17e) 7.3/5.7 P/E (FY16e/17e) 22.4/20.0 EPS growth (FY15/16e/17e) 25.7/35.9/9.7 ROE (FY15/16e/17e) 34.7/36.4/31.0 ROA(FY15/16e/17e) 35.1/36.7/31.3 D/E ratio (FY15/16e/17e) -/-/- BSE Code NSE Code ATULAUTO Bloomberg ATA IN Reuters ATUL.BO Shareholding pattern % Promoters 52.7 MFs / Banks / FIs 10.0 Foreign 6.3 Govt. Holding - Total Public 31.0 Total As on Dec 31, 2015 Recommendation ACCUMULATE Phone: + 91 (33) E- mail: research@cdequi.com Company Brief Atul Auto Ltd. is one of the youngest players in the 3 wheelers business with humble beginning in 1992 that started with manufacturing of Chhakaras (Rural Transportation Vehicle- RTV). It produces auto rickshaw under various product names- Atul Shakti, Atul Smart, Atul Gem and Atul Gemini-DZ. Quarterly Highlights AAL s total volumes in 9MFY16 grew by 6% overall whereas its exports rose at 21% y-o-y. As a result of modest increase in sales volumes revenues grew by just 8.4% y-o-y. The net profit has seen a growth of 21.5% (y-o-y) to Rs crs compared to Rs crs in the same period a year ago. AAL s cargo segment market share has gone up to 20% in 9MFY16 FY16 as compared to 18% in the same period last year. The company has achieved 200 primary dealerships in 9MFY16 as compared to 180 in FY15. Its international presence is also on an increase with a total number of 8 distributors for exports. Demand sentiment was bad which had affected trade receivables in Q2FY15. Working capital has worsened a little more in Q3FY16 but is expected to return to normal in a few quarters. Although the demand for diesel vehicles is very strong in rural and semi-urban areas, it suffered in the last quarter due to the bad monsoons. The ability to maintain positive growth even in dampening market conditions clouded with negative sentiments portrays AAL s ability to sustain the same in the future. Positive growth in EPS and revenues together with its plans to maintain the debt free status works in its favor. The stock trades at a currently trades at 21.9x FY16e EPS of Rs and 20.0 x FY17e EPS of Rs Aided by higher operating margins (14.7% vs 11.6%), earnings advanced by a spectacular 21.6% in the first three quarters of current fiscal. AAL s three wheeler volumes in FY16 have grown at the lowest rate (5.5%) in last four years, goading us to cut next year EPS estimate by 8.9%. Yet there exists high chance of revival in the Indian automobile sector in the near term. We, therefore, assign accumulate rating on the stock with revised target of Rs 561 (previous target: Rs 586) based on 22x FY17e earnings (peg ratio:1; on FY15-FY17 earnings growth), over a period of 6-9 months; forward P/E justified not least due to high probability of dramatic improvement in volumes. Figures (Rs crs) FY13 FY14 FY15 FY16e FY17e Income from Operations Other Income EBIDTA (other income included) Net Profit EPS EPS growth (%)

2 [ Outlook & Recommendation Outlook of Three Wheeler Industry Exports of cars, utility vehicles, commercial vehicles and two-wheelers have grown every year since In , Indian factories exported a record 3.5 million vehicles which, according to industry statistics, was 15% more than what they managed a year back (refer chart below). This compares with domestic sales of just above 19.7 million units during the same period, up 7.2% from the previous year. The market for three wheelers in India witnessed a quick increase during early 1950s. Three wheelers are an essential ingredient of the country's automobile sector as they are one of the most favored means of transport in rural as well as urban India. The industry witnessed a minor decline in 2011 which can be accredited to government policies such as cap on permits and elevated interest rates. However, the market has been performing quite well thereafter as a result of rising population and growing commercialization which are all contributing to unprecedented use of three wheelers for intra city transportation. Source: SIAM, CD Equisearch Source: AAL India s three wheeler market is categorized into passenger carrier and goods carrier three wheelers. Passenger carrier three wheelers are used for public transportation, while goods carrier three wheelers are used for carrying goods and materials over short and intermediate distances. Increasing demand for cheap and suitable public conveyance in rural and semi urban areas and increasing number of permits being issued by state governments across the country are also playing a greater role in driving the demand for three wheeler markets in India. The demand for passenger carrier three wheelers exceeds that of goods carrier three wheelers in domestic as well as export markets including South Asia, Africa and Latin America. BREAK UP OF TOTAL INDUSTRY SALES Source: AAL Source: AAL 2 2

3 Roadmap for AAL Despite the slowdown in three wheeler sector in some parts of the country and stiff competition from other players, the business performance of AAL continues to be robust during the 9mFY16. AAL continues to have a strong marketing and distribution network with a pan-india presence with the exception of 2 major states- West Bengal and Tamil Nadu. It is present in the rural and semi-urban segment in and now plans to focus on penetrating the urban markets. It has 200 primary dealers and 120 secondary dealerships in totality. It plans to enter into all the geographies with three wheeler potential in the next 3-5 years across India. Its long term plan includes increasing market share because better penetration opportunities exist. The focus will now be more on tier II cities and urban sector. There were around 180 dealers in FY15 which increased to 200 in FY16. This was a lower addition in absolute terms than expected. However it plans to add dealers domestically in the next fiscal year. PRESENCE IN INDIA Source: AAL Source: AAL Overseas presence includes presence in countries like Bangladesh, Tanzania, Kenya, South Africa, Nigeria and Jamaica. Beyond Africa, AAL plans to venture into countries like Sri Lanka, Indonesia and Bangladesh. There is also sound potential in Latin American countries. There are a total of 8 distributors in the export segment and AAL plans to add more in the next couple of years. AAL plans to increase its share of exports to 17%-25% of its total sales in the next 3-5 years compared to the 4% for FY15. There is very little scope for technological advancement as far as three wheelers are concerned. AAL is focusing more on offering better features, low maintenance or no maintenance vehicles to the customers and better after sale service. AAL does not believe in pricing its product below that of its competitors. It will maintain its price at par with competition in export segment. Instead it will focus more on providing better features to end customers. Typical end users include large corporate in FMCG, pharmaceuticals and construction, mid-size companies for captive use and business proposition and individuals who use it as a means of self employment. Growth in the consumer driven industries has been driving growth in the past. Financials and Valuations India is one of the largest manufacturers of three-wheelers producing a volume of ~9.4 lakh units p.a. and growing at 6-8% p.a., having a domestic demand of ~5.5 lakh units p.a. Government focus on development of rural road infrastructure coupled with the ease of availability for permits for fuels like CNG/LPG driven vehicles is assisting in the passenger application in the rural and semi-urban areas. The overall auto industry registered a marginal growth of 1.67% in Apr-Feb 16 period. Three wheelers sales declined by -0.5% in April-February 2016 over the same period last year - passenger carrier sales increased by 0.24%, while the goods carrier sales declined by 3.75%. 3 3

4 Source: CD Equisearch; AAL Source: CD Equisearch; AAL Source: CD Equisearch; AAL AAL has marginally increased its market share to 8.07 % in 9mFY16. The new gasoline vehicle which was launched this year has garnered excellent response and AAL expects the good response to continue in the future as well. AAL s revenues are projected to rise by 10.4% in the current fiscal. However operating margins are expected hover at 15%. It is going to set up a new plant for vehicles in Ahmedabad, Gujarat, involving a capex of approximately Rs 150 cr, which will be funded through internal accruals. Source: CD Equisearch; AAL Source: CD Equisearch; AAL Source: CD Equisearch; AAL The stock trades at a currently trades at 21.9x FY16e EPS of Rs and 20.0 x FY17e EPS of Rs Aided by higher operating margins (14.7% vs 11.6%), earnings advanced by a spectacular 21.6% in the first three quarters of current fiscal. AAL s three wheeler volumes in FY16 have grown at the lowest rate (5.5%) in last four years, goading us to cut next year EPS estimate by 8.9%. Yet there exists high chance of revival in the Indian automobile sector in the near term. We, therefore, assign accumulate rating on the stock with revised target of Rs 561 (previous target: Rs 586) based on 22x FY17e earnings (peg ratio:1; on FY15-FY17 earnings growth), over a period of 6-9 months. For more information, refer to our previous report dated 17 th June, 2015) Source: CD Equisearch; AAL Source: CD Equisearch; AAL 4 4

5 Risks and Concerns Easing growth The last few years have been particularly challenging for the Indian economy. Subdued GDP growth, sustained high inflation and plummeting currency may pose significant threat to company's growth going ahead. The economic environment, pricing pressure could negatively affect AAL's operating results. Margin pressure AAL may face difficulties in procuring raw material at competitive prices because of its relatively small size of operations compared to its competitors and therefore may have adversely impact margins. Weak monsoons Poor monsoons could impact demand for three wheelers not only in rural areas but also in tier II and III cities. 5 5

6 Financials Quarterly Results Figures in Rs crs Q3FY16 Q3FY15 % chg 9MFY16 9MFY15 % chg Income From Operations Other Income Total Income Total Expenditure EBITDA (other income included) Interest Depreciation PBT Tax PAT Extraordinary Item Net Profit EPS(Rs) Income Statement Figures in Rs crs FY13 FY14 FY15 FY16e FY17e Income From Operations Growth (%) Other Income Total Income Total Expenditure EBITDA (other income included) Interest Depreciation PBT Tax PAT Extraordinary Item Net Profit EPS (Rs)

7 Balance Sheet Figures in Rs crs FY13 FY14 FY15 FY16e FY17e Sources of Funds Share Capital Reserves Total Shareholders Funds Long Term Debt Total Liabilities Application of Funds Gross Block Less: Accumulated Depreciation & Impairment Net Block Capital Work in Progress Investments Current Assets, Loans & Advances Inventory Trade receivables Cash and Bank Short term loans (inc. other current assets) Total CA Current Liabilities Provisions-Short term Total Current Liabilities Net Current Assets Net Deferred Tax Liability Net long term assets ( net of liabilities) Total Assets

8 Cash Flow Statement Figures in Rs crs FY13 FY14 FY15 FY16e FY17e Net Income (a) Non cash exp. & others (b) Depreciation Loss/ (profit) on sale of Fixed Assets Prov. of diminution in value of investment Deferred tax and others (Increase) / decrease in NWC (c) Trade Receivables Inventories Other assets Other liabilities Operating cash flow (a+b+c) Purchase of Fixed Assets Proceeds from sale of Fixed Assets Investing cash flow (d) Equity dividend paid Income tax on dividend Financing cash flow (e) Net change (a+b+c+d+e) *adjusted for capital advances ** includes change in fixed deposits 8 8

9 Key Financial Ratios FY13 FY14 FY15 FY16e FY17e Growth Ratios(%) Revenue EBITDA Net Profit EPS Margins (%) Operating Profit Margin Gross profit Margin Net Profit Margin Return (%) ROCE RONW Valuations Market Cap/ Sales EV/EBITDA P/E P/BV Other Ratios Interest Coverage Debt Equity Current Ratio Turnover Ratios Fixed Asset Turnover Total Asset Turnover Inventory Turnover Debtors Turnover Creditor Turnover WC Ratios Inventory Days Debtor Days Creditor Days Cash Conversion Cycle

10 Financial Summary US dollar denominated million $ FY13 FY14 FY15 FY16e FY17e Equity capital Shareholders funds Total debt Net fixed assets (incl CWIP) Investments Net current assets Total assets Revenues EBITDA EBDT PBT PAT EPS($) Book value ($) Operating cash flow Investing cash flow Financing cash flow *income statement figures translated at average rates; balance sheet at year end rates; projections at current rates All dollar denominated figures are adjusted for extraordinary items

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