Institutional Equities

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1 3QFY18 Result Update Institutional Equities Atul Auto 15 February 2018 Reuters: ATUL.BO; Bloomberg: ATUL IN Higher Expenses Drag Profitability Atul Auto s (AAL) 3QFY18 earnings missed our expectations on account of poor operating-level performance. EBITDA margin for the quarter at 12.1% was 300bps below our estimate because of higher other expenditure, comprising one-time cost of Rs22.5mn towards new product development (alternative-fuel vehicle) and expenditure towards development of new BS-VI diesel engine. It was indicated that as the development expenses represent a part of the costs to be incurred in future, AAL may need to incur more such expenditure on account of research-related activity. Excluding the one-off item, other expenditure rose on account of higher marketing costs and packaging expenses relating to export sales. Employee expenses fell during the quarter on account of reversal of certain provisions, thereby creating one-time gains. Realisation growth for the quarter was strong with realisation up 6% YoY because of price hikes done for implementation of BS-IV emission norms. A price hike undertaken in the range of 1.0%-1.5% in February 2018 should result in sequential expansion in realisation in 4QFY18. Absolute EBITDA at Rs156mn fell 17%/42% YoY/QoQ, respectively, and was 20% below our estimate, while PAT at Rs97mn (down 20%/43% YoY/QoQ, respectively) was 19% below our estimate. At the conference call, the company indicated that it is looking at good volume growth momentum in the rest of the financial year on account of demand improvement. Last year s low base caused by demonetisation should result in strong YoY growth in the coming months. In FY19, the company expects export demand to improve further on repeat orders being received from nearly all its export markets. As regards electric three-wheelers, the company stated that an improved version of its e-rickshaw model will be launched by the end of FY19. Following weak margins, our EBITDA/PAT estimates for FY18E stand reduced by 5%/4%, respectively, while FY19E/FY20E earnings remain largely unchanged. We have retained our Buy rating on AAL with a target price of Rs490 (17x FY20E EPS of Rs28.8) from Rs488 earlier (18x September 2019E EPS). Volume growth indicates green shoots of recovery: While AAL s 3QFY18 volume witnessed a falling trend, we note that it has registered a robust 70% YoY growth in volume in January 2018 with the remaining two months of the financial year also likely to report double-digit growth. 3QFY18 realisation at Rs1,28,926 grew 6% YoY owing to pass-through of revised engine prices in the aftermath of BS-IV emission norms being enforced. Given the amelioration in volume growth and likely long-term demand traction on account of government spending on infrastructure, road building and rural expenditure, we have marginally revised upwards our volume estimates by 1% each for FY18E/FY19E/FY20E. Outlook and valuation: We believe that while volume growth in the fourth quarter will experience improvement (AAL registered sales of 4,000 vehicles in January 2018), it will continue to face competitive headwinds from bigger rivals like Bajaj Auto in the domestic market. Considering the relatively weak margin during the quarter, we have cut our margin estimate by ~90bps for FY18e to 13.4%, while retaining FY19E/FY20E margins. Our earnings estimates for FY19e/FY20e remain largely unchanged. We have retained our Buy rating on AAL with a target price of Rs490 (17x FY20E EPS of Rs28.8) from Rs488 earlier (18x September 2019E EPS). BUY Sector: Automobile CMP: Rs420 Target Price: Rs490 Upside: 17% Gaurant Dadwal Research Analyst gaurant.dadwal@nirmalbang.com Vivek Sarin Research Associate vivek.sarin@nirmalbang.com Key Data Current Shares O/S (mn) 21.9 Mkt Cap (Rsbn/US$mn) 9.2/ Wk H / L (Rs) 512/389 Daily Vol. (3M NSE Avg.) 45,377 Price Performance (%) 1 M 6 M 1 Yr Atul Auto (6.8) (4.6) (0.6) Nifty Index (7.0) Source: Bloomberg Y/E March (Rsmn) 3QFY17 2QFY18 3QFY18 YoY (%) QoQ (%) Revenues 1,348 1,599 1,290 (4.3) (19.3) Raw material costs 969 1, (4.0) (19.1) % of sales bps 20bps Staff costs (13.4) (19.5) % of sales (71bps) (2bps) Other expenses % of sales bps 458bps Total expenditure 1,159 1,329 1,134 (2.1) (14.7) EBITDA (17.3) (42.1) EBITDAM (%) (191bps) (476bps) Depreciation Interest costs Other income (57.4) (17.3) PBT (21.3) (44.2) Tax (24.1) (46.7) Net profit (19.8) (42.8) NPM (%) (145bps) (310bps) EPS (Rs) (19.8) (42.8)

2 Exhibit 1: Key financials Revenues 5,310 4,753 5,426 6,212 6,975 YoY (%) 7.7 (10.6) EBITDA ,002 % of sales Adj. PAT YoY (%) 17.2 (21.3) Adj. EPS (Rs) RoE (%) RoCE (%) P/E (x) P/BV (x) Exhibit 2: Change in our estimates New estimates Old estimates Change (%) (Rsmn) FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Volume 42,228 48,336 55,917 41,718 47,785 55, Net sales 5,426 6,212 6,975 5,344 6,146 7, (0.4) EBITDA , ,004 (4.7) 1.0 (0.2) EBITDA margin (%) (92)bps (4)bps 7bps PAT (4.3) 0.8 (0.2) EPS (Rs) (4.2) 0.8 (0.2) Exhibit 3: Deviation of our estimates from actual performance in 3QFY18 (Rsmn) Actual Our estimate Deviation 3QFY18 3QFY18 % Net sales 1,290 1,298 (0.6) EBITDA (20.5) Net profit (19.2) Source: Nirmal Bang Institutional Equities Research Key takeaways from post-result conference-call Volume and demand: The overall three-wheeler industry registered YTD growth of 11.5% YoY with 11.3% domestic growth and 30% YoY export-led growth. AAL registered domestic sales of 28,748 vehicles in YTDFY18 compared to 28,639 in the same period last year, while export volume grew over 30% on a low base from 1,771 to 2,370 in YTDFY18. The management indicated that volume growth over the next two months will remain positive. Product composition: AAL s product portfolio comprises passenger and cargo vehicles in nearly ratio. Its petrol passenger three-wheelers have been receiving a good response domestically. The company has applied for three-wheeler passenger permits in Maharashtra while it has received approval for a cargo segment three-wheeler. EBITDA margin: The quarter witnessed a margin compression on account of one-time expenditure of Rs22.5mn towards new product development (alternative-fuel vehicle) and expenditure towards development of new BS-VI diesel engine. It was indicated that as the development expenses represent a part of the costs to be incurred in future, AAL may need to incur more such expenditure on account of research-related activity. Price revision: The management announced a price hike in the range of 1.0%-1.5% with effect from February Capacity and utilisation: AAL s production capacity stands at 60,000 vehicles/year and is currently operating at ~70%of capacity. Going forward, the company states that capacity utilisation level will witness an improvement. 2 Atul Auto

3 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Institutional Equities Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 New launches: AAL had previously made a soft launch of its electric three-wheeler and started distributing the same through limited dealers. The company introduced its e-rickshaw model in Bihar and Gujarat, while an improved version of the same is in introductory phase in Maharashtra and Karnataka. AAL will be making a pan-india launch of its alternative fuel segment vehicle (in conformance with BS-VI engines) by FY19. Sales of its electric vehicles in Gujarat and Bihar are presently clocking 10% MoM growth in volume with pricing at par with those of competitors. Exports: AAL currently supplies vehicles to 12 export markets where demand is largely for petrol-based three-wheelers. The management sounded confident of a positive export outlook going forward, with the company receiving repeat orders from nearly all overseas geographies that it has entered. Others: AAL announced the incorporation of its wholly-owned subsidiary, Atul Green Auto Pvt Ltd., with an objective of exploring opportunities in providing e-mobility and generating clean sources of energy, requiring minor additional capex. The management stated that it will be expanding its dealer network going forward Exhibit 4: P/E chart (x) Exhibit 5: EV/EBITDA chart (x) PE Mean 1sd -1sd Source: Nirmal Bang Institutional Equities Research EV/EBITDA Mean 1sd -1sd Source: Nirmal Bang Institutional Equities Research 3 Atul Auto

4 Financials Exhibit 6: Income statement Net sales 5,310 4,753 5,426 6,212 6,975 % growth 7.7 (10.6) Raw material costs 3,849 3,457 3,946 4,518 5,065 Staff costs Other expenses Total expenditure 4,547 4,155 4,700 5,326 5,973 EBITDA ,002 % growth 31.9 (21.5) EBITDA margin (%) Other income Interest costs Gross profit 1,462 1,296 1,480 1,694 1,910 % growth 21.2 (11.3) Depreciation Profit before tax % growth 20.9 (21.0) Tax Effective tax rate (%) Net profit % growth 17.2 (21.3) EPS (Rs) % growth 17.2 (21.3) DPS (Rs) Payout (%) Exhibit 8: Balance sheet Equity Reserves 1,434 1,695 1,868 2,135 2,467 Net worth 1,546 1,807 1,980 2,247 2,579 Net deferred tax liabilities LT liabilities/provisions Total loans Liabilities 1,601 1,873 2,046 2,312 2,644 Gross block 1,272 1,380 1,580 1,880 2,180 Depreciation Net block ,047 1,272 1,482 Capital work-in-progress LT Investments Other long-term assets Inventories Debtors Cash Cash and cash equivalents Other bank balances Other current assets Total current assets 1,283 1,434 1,483 1,589 1,773 Trade payables Other current liabilities/provisions Total current liabilities Net current assets ,010 Total assets 1,601 1,873 2,046 2,312 2,644 Exhibit 7: Cash flow EBIT (Inc.)/dec. in working capital (406) (15) (1) Cash flow from operations Other income 1 (25) (22) (27) (34) Other expenses (1) Depreciation Tax paid (254) (192) (227) (275) (311) Net cash from operations Capital expenditure (100) (108) (200) (300) (300) Free cash flow Other investment activity Cash from financial activities (139) (45) (241) (241) (241) Opening cash balance Closing cash balance Change in cash balance (130) Exhibit 9: Key ratios Y/E March FY16 FY17 FY18E FY19E FY20E Profitability & return ratios EBITDA margin (%) EBIT margin (%) Net profit margin (%) RoE (%) RoCE (%) Working capital & liquidity ratios Receivables (days) Inventory (days) Payables (days) WC days Current ratio (x) Quick ratio (x) Valuation ratios EV/Sales (x) EV/EBITDA (x) P/E (x) P/BV (x) Growth (%) Sales 7.7 (10.6) EBITDA 31.9 (21.5) PAT 17.2 (21.3) Atul Auto

5 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 30 December 2015 Buy January 2016 Buy February 2016 Buy June 2016 Buy August 2016 Buy November 2016 Buy February 2017 Acc February 2017 Buy May 2017 Buy August 2017 Accumulate December 2017 Buy Rating track graph Not Covered Covered 5 Atul Auto

6 DISCLOSURES This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) for private circulation. NBEPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH NBEPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. NBEPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBEPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBEPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBEPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBEPL or its associates or Analyst or his relatives do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBEPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBEPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBEPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: I/We, Gaurant Dadwal, the research analysts and Vivek Sarin, the research associate are the author of this report, hereby certify that the views expressed in this research report accurately reflects my/our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 6 Atul Auto

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