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 +91-22-6273 8145 Vivek Sarin Research Associate vivek.sarin@nirmalbang.com +91-22-6273 8176 Key Data Current Shares O/S (mn) 21.9 Mkt Cap (Rsbn/US$mn) 9.2/143.8 52 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) 17.0 28.8 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 1,149 930 (4.0) (19.1) % of sales 71.9 71.9 72.1 23bps 20bps Staff costs 100 108 87 (13.4) (19.5) % of sales 7.4 6.7 6.7 (71bps) (2bps) Other expenses 90 72 117 29.9 62.5 % of sales 6.7 4.5 9.1 239bps 458bps Total expenditure 1,159 1,329 1,134 (2.1) (14.7) EBITDA 189 269 156 (17.3) (42.1) EBITDAM (%) 14.0 16.8 12.1 (191bps) (476bps) Depreciation 13.2 13.1 13.4 1.5 2.3 Interest costs 1 1 1 85.7 85.7 Other income 10 5 4 (57.4) (17.3) PBT 185 261 146 (21.3) (44.2) Tax 64 91 49 (24.1) (46.7) Net profit 121 170 97 (19.8) (42.8) NPM (%) 9.0 10.6 7.5 (145bps) (310bps) EPS (Rs) 5.5 7.7 4.4 (19.8) (42.8)
Exhibit 1: Key financials Revenues 5,310 4,753 5,426 6,212 6,975 YoY (%) 7.7 (10.6) 14.0 14.8 12.1 EBITDA 763 599 726 886 1,002 % of sales 14.4 12.6 13.4 14.3 14.4 Adj. PAT 474 373 461 559 632 YoY (%) 17.2 (21.3) 23.6 21.1 13.1 Adj. EPS (Rs) 21.6 17.0 21.1 25.5 28.8 RoE (%) 34.4 22.3 24.4 26.4 26.2 RoCE (%) 35.6 23.4 26.1 28.5 28.4 P/E (x) 19.4 24.6 19.9 16.5 14.6 P/BV (x) 5.9 5.9 5.1 4.6 4.1 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 55,323 1.2 1.2 1.1 Net sales 5,426 6,212 6,975 5,344 6,146 7,003 1.5 1.1 (0.4) EBITDA 726 886 1,003 762 877 1,004 (4.7) 1.0 (0.2) EBITDA margin (%) 13.4 14.3 14.4 14.3 14.3 14.3 (92)bps (4)bps 7bps PAT 461 559 632 482 554 633 (4.3) 0.8 (0.2) EPS (Rs) 21.1 25.5 28.8 22.0 25.3 28.9 (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 156 196 (20.5) Net profit 97 120 (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 50-50 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 2018. 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
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) 40 35 30 25 20 15 10 5 0 Exhibit 5: EV/EBITDA chart (x) 35 30 25 20 15 10 5 0 PE Mean 1sd -1sd Source: Nirmal Bang Institutional Equities Research EV/EBITDA Mean 1sd -1sd Source: Nirmal Bang Institutional Equities Research 3 Atul Auto
Financials Exhibit 6: Income statement Net sales 5,310 4,753 5,426 6,212 6,975 % growth 7.7 (10.6) 14.0 14.8 12.1 Raw material costs 3,849 3,457 3,946 4,518 5,065 Staff costs 373 390 407 441 496 Other expenses 325 307 347 367 412 Total expenditure 4,547 4,155 4,700 5,326 5,973 EBITDA 763 599 726 886 1,002 % growth 31.9 (21.5) 21.3 22.0 13.1 EBITDA margin (%) 14.4 12.6 13.4 14.3 14.4 Other income 13 25 22 27 34 Interest costs 8 6 5 5 5 Gross profit 1,462 1,296 1,480 1,694 1,910 % growth 21.2 (11.3) 14.2 14.4 12.8 Depreciation 53 53 55 75 89 Profit before tax 715 565 689 834 943 % growth 20.9 (21.0) 21.8 21.1 13.1 Tax 241 192 227 275 311 Effective tax rate (%) 33.7 34.0 33.0 33.0 33.0 Net profit 474 373 461 559 632 % growth 17.2 (21.3) 23.6 21.1 13.1 EPS (Rs) 21.6 17.0 21.1 25.5 28.8 % growth 17.2 (21.3) 23.6 21.1 13.1 DPS (Rs) 5.3 1.5 9.0 9.0 9.0 Payout (%) 24.3 8.8 42.7 35.3 31.2 Exhibit 8: Balance sheet Equity 112 112 112 112 112 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 50 54 54 54 54 LT liabilities/provisions 5 12 12 12 12 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 426 477 533 608 697 Net block 846 903 1,047 1,272 1,482 Capital work-in-progress 29 - - - - LT Investments 10 78 78 78 78 Other long-term assets 47 40 74 74 74 Inventories 347 362 282 323 363 Debtors 764 478 475 458 419 Cash 128 571 713 795 978 Cash and cash equivalents 128 571 713 795 978 Other bank balances - - - - - Other current assets 45 23 13 13 13 Total current assets 1,283 1,434 1,483 1,589 1,773 Trade payables 360 360 335 384 430 Other current liabilities/provisions 254 223 300 317 333 Total current liabilities 614 582 635 701 763 Net current assets 669 852 847 889 1,010 Total assets 1,601 1,873 2,046 2,312 2,644 Exhibit 7: Cash flow EBIT 715 571 693 838 947 (Inc.)/dec. in working capital (406) 96 62 (15) (1) Cash flow from operations 309 667 755 823 946 Other income 1 (25) (22) (27) (34) Other expenses (1) - - - - Depreciation 53 53 55 75 89 Tax paid (254) (192) (227) (275) (311) Net cash from operations 109 502 561 596 690 Capital expenditure (100) (108) (200) (300) (300) Free cash flow 9 394 361 296 390 Other investment activity - 93 22 27 34 Cash from financial activities (139) (45) (241) (241) (241) Opening cash balance 258 128 571 713 795 Closing cash balance 128 571 713 795 978 Change in cash balance (130) 443 142 82 183 Exhibit 9: Key ratios Y/E March FY16 FY17 FY18E FY19E FY20E Profitability & return ratios EBITDA margin (%) 14.4 12.6 13.4 14.3 14.4 EBIT margin (%) 13.4 11.5 12.4 13.1 13.1 Net profit margin (%) 8.9 7.9 8.5 9.0 9.1 RoE (%) 34.4 22.3 24.4 26.4 26.2 RoCE (%) 35.6 23.4 26.1 28.5 28.4 Working capital & liquidity ratios Receivables (days) 53 37 32 27 22 Inventory (days) 24 28 19 19 19 Payables (days) 34 38 31 31 31 WC days 43 27 20 15 10 Current ratio (x) 2.1 2.5 2.3 2.3 2.3 Quick ratio (x) 1.5 1.8 1.9 1.8 1.8 Valuation ratios EV/Sales (x) 1.7 1.8 1.6 1.4 1.2 EV/EBITDA (x) 11.9 14.4 11.7 9.5 8.2 P/E (x) 19.4 24.6 19.9 16.5 14.6 P/BV (x) 5.9 5.9 5.1 4.6 4.1 Growth (%) Sales 7.7 (10.6) 14.0 14.8 12.1 EBITDA 31.9 (21.5) 21.3 22.0 13.1 PAT 17.2 (21.3) 23.6 21.1 13.1 4 Atul Auto
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 541 671 11 January 2016 Buy 538 671 12 February 2016 Buy 456 621 1 June 2016 Buy 490 592 11 August 2016 Buy 395 490 16 November 2016 Buy 413 500 7 February 2017 Acc. 426 475 28 February 2017 Buy 421 518 17 May 2017 Buy 424 489 22 August 2017 Accumulate 450 489 5 December 2017 Buy 426 488 Rating track graph 700 650 600 550 500 450 400 350 300 Not Covered Covered 5 Atul Auto
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