Management Meet Update Atul Auto 23 August 2017 Reuters: ATUL.BO; Bloomberg: ATUL IN We had a meeting with the management of Atul Auto (AAL) recently to gauge its performance in the aftermath of a relatively challenging environment in FY17. The key takeaways from the meeting are as follows: Market share trend: The management believes that with the uncertainty surrounding the previous financial year behind, AAL can regain its lost market share by launching new vehicles in the coming quarters. Compared to overall three-wheeler industry volume contraction of 8.9% in 1QFY18, AAL posted 18% YoY growth. AAL s domestic sales volume improved 12% YoY against 25% industry decline. AAL s cargo vehicle segment registered 23% YoY jump in volume which enabled it to regain its position as the second-largest player in this space. Its YTD FY18 market share in the domestic cargo segment stands at 17.1% versus 16.5% in FY17, while in the domestic passenger space it remained flat at 4.7%. New vehicle launches: AAL has introduced its petrol three-wheeler model in five states including Gujarat, Karnataka, Haryana, Punjab and Rajasthan and will do a pan-india launch by the end of this year. The launch has been delayed by six months as it had to develop its own engine and it was followed by the transition to BS-IV emission norms which prolonged the launch time. The management has given guidance of double-digit volume growth for FY18 with domestic volume expected to grow in the range of 6% - 8%. Electric vehicle update: The company sees potential for electric three-wheelers in India with the market size for e-rickshaws estimated at close to 120,000 vehicles per year. Most players dominating the landscape are unorganised vendors who import parts from China and assemble the same locally. The selling price for the same is in the range of Rs80,000- Rs150,000 per vehicle. AAL is looking to price its model at ~Rs140,000/vehicle (on-road price) and will be tying up with financers to facilitate purchase by end-users. The vehicle will run on four batteries which have an average life span of 10-12 months and a replacement cost of Rs20,000-Rs25,000 for a set of four batteries. Average charging time is between seven-eight hours, enabling the vehicle to run for 70km-80km on a single charge. The batteries fitted into the vehicle will be higher life cycle lithium ion batteries as against lead acid batteries and will be sourced from Amara Raja Batteries and Exide Industries. The company does not see export potential for its electric vehicles and it will disclose future growth outlook after a full-scale launch in 2HFY18. Retains export focus: Currently, the company caters to eight export geographies comprising three countries in Latin America, four in Africa and also Nepal. The June 2017 quarter witnessed a sharp 50% jump in demand from the Latin American region whereas Africa continues to experience sluggish growth owing to limited availability of forex. Demand from Bangladesh has been impacted because of a government ban on plying of threewheelers on highways, while sales volume to Sri Lanka has been affected because of local import duty. The company still sees a substantial jump in export volume in the current year and expects a rising share of export contribution to total sales in the coming years. In 1QFY18, its exports more than doubled to 865 vehicles on a low base compared to 25% YoY industry export growth. Realisation from exports is usually at a premium of 4%-5% (excurrency) over domestic realisation owing to government incentives. Ahmedabad plant expansion: Ahmedabad unit s capacity expansion has been put on hold and the management is likely to take a decision on it in 2HFY18. It has incurred capex of Rs450mn on the plant with a further Rs1,000mn being put on hold. Commercial rollout of vehicles from the plant will take around 18 months and once completed, will add an incremental 60,000 vehicles/annum to its capacity. Impact of Goods and Services Tax or GST/BS-IV emission norms: The management does not expect GST implementation to aid in volume recovery, although it has revised downwards the price of its vehicles by 2%. It will now pay at the rate of 28% instead of ~30% earlier (12.5% excise duty + 2% Central Sales Tax + 15% Value Added Tax). AAL currently does not have BS-III vehicle inventory. Near-term outlook: Driven by healthy rural demand following a good monsoon, AAL expects 2QFY18 (a seasonally good quarter) performance to be better than the year-ago period and the same will aid in expanding margins at operating level. It has given EBITDA margin guidance in the range of 12%-14% for FY18. We are participating in AsiaMoney s Brokers Poll 2017. We would be pleased if you vote for us as the feedback helps us align our equity research offerings to meet your requirements. Click Here ACCUMULATE Sector: Automobile CMP: Rs445 Target Price: Rs489 Upside: 10% Gaurant Dadwal Research Analyst gaurant.dadwal@nirmalbang.com +91-22-3926 8145 Vivek Sarin Research Associate vivek.sarin@nirmalbang.com +91-22-3926 8176 Key Data Current Shares O/S (mn) 21.9 Mkt Cap (Rsbn/US$mn) 9.9/154.1 52 Wk H / L (Rs) 512/389 Daily Vol. (3M NSE Avg.) 46,199 Price Performance (%) 1 M 6 M 1 Yr Atul Auto 6.6 7.6 8.1 Nifty Index (1.5) 9.4 13.2 Source: Bloomberg
Aug-06 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-06 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 Exhibit 1: Key financials Revenues 4,928 5,310 4,753 5,359 6,228 YoY (%) 14.2 7.7 (10.6) 12.9 16.3 EBITDA 578 763 599 764 934 % of sales 11.7 14.4 12.6 14.3 15.0 Adj. PAT 405 474 373 494 594 YoY (%) 36.2 17.2 (21.3) 32.3 20.4 Adj. EPS (Rs) 18.5 21.6 17.0 22.6 27.1 RoE (%) 37.6 34.4 22.3 25.9 27.5 RoCE (%) 32.4 35.6 23.4 27.1 29.2 P/E (x) 24.1 20.5 26.1 19.7 16.4 P/BV (x) 8.0 6.3 6.3 5.4 4.8 Exhibit 2: P/E chart (x) 40 35 30 25 20 15 10 5 0 Exhibit 3: EV/EBITDA chart (x) 35 30 25 20 15 10 5 0 PE Mean 1sd -1sd Source: Nirmal Bang Research EV/EBITDA Mean 1sd -1sd Source: Nirmal Bang Research 2 Atul Auto
Financials Exhibit 4: Income statement Net sales 4,928 5,310 4,753 5,359 6,228 % growth 14.2 7.7 (10.6) 12.9 16.3 Raw material costs 3,722 3,849 3,457 3,908 4,516 Staff costs 324 373 390 370 436 Other expenses 304 325 307 316 343 Total expenditure 4,350 4,547 4,155 4,594 5,294 EBITDA 578 763 599 764 934 % growth 27.6 31.9 (21.5) 27.7 22.1 EBITDA margin (%) 11.7 14.4 12.6 14.3 15.0 Other income 59 13 25 41 46 Interest costs 6 8 6 5 5 Gross profit 1,206 1,462 1,296 1,450 1,712 % growth 22.4 21.2 (11.3) 11.9 18.0 Depreciation 56 53 53 64 88 Profit before tax 592 715 565 737 887 % growth 38.6 20.9 (21.0) 30.4 20.4 Tax 187 241 192 243 293 Effective tax rate (%) 31.6 33.7 34.0 33.0 33.0 Net profit 405 474 373 494 594 % growth 36.2 17.2 (21.3) 32.3 20.4 EPS (Rs) 18.5 21.6 17.0 22.6 27.1 % growth 36.2 17.2 (21.3) 32.3 20.4 DPS (Rs) 5.0 5.3 1.5 9.0 9.0 Payout (%) 27.1 24.3 8.8 39.9 33.2 Exhibit 6: Balance sheet Equity 112 112 112 112 112 Reserves 1,099 1,434 1,695 1,898 2,196 Net worth 1,211 1,546 1,807 2,010 2,308 Net deferred tax liabilities 52 50 54 54 54 LT liabilities/provisions 5 5 12 12 12 Total loans - - - - - Liabilities 1,268 1,601 1,873 2,075 2,374 Gross block 1,170 1,272 1,380 1,880 2,380 Depreciation 375 426 477 550 641 Net block 794 846 903 1,330 1,739 Capital work-in-progress 5 29 - - - LT Investments 10 10 78 78 78 Other long-term assets 90 47 40 74 74 Inventories 260 347 362 279 324 Debtors 322 764 478 469 459 Cash 258 128 571 464 387 Cash and cash equivalents 258 128 571 464 387 Other bank balances - - - - - Other current assets 35 45 23 13 13 Total current assets 876 1,283 1,434 1,224 1,184 Trade payables 267 360 360 332 384 Other current liabilities/provisions 239 254 223 299 318 Total current liabilities 507 614 582 631 701 Net current assets 369 669 852 593 483 Total assets 1,268 1,601 1,873 2,075 2,374 Exhibit 5: Cash flow EBIT 593 715 571 742 892 (Inc.)/dec. in working capital (205) (406) 96 71 (22) Cash flow from operations 388 309 667 813 870 Other income - 1 (25) (41) (46) Other expenses 2 (1) - - - Depreciation 56 53 53 64 88 Tax paid (165) (254) (192) (243) (293) Net cash from operations 281 109 502 592 619 Capital expenditure (364) (100) (108) (500) (500) Free cash flow (83) 9 394 92 119 Other investment activity - - 93 41 46 Cash from financial activities (111) (139) (45) (241) (241) Opening cash balance 374 258 128 571 464 Closing cash balance 181 128 571 464 388 Change in cash balance (194) (130) 443 (107) (76) Exhibit 7: Key ratios Y/E March FY15 FY16 FY17 FY18E FY19E Profitability & return ratios EBITDA margin (%) 11.7 14.4 12.6 14.3 15.0 EBIT margin (%) 10.6 13.4 11.5 13.1 13.6 Net profit margin (%) 8.2 8.9 7.9 9.2 9.5 RoE (%) 37.6 34.4 22.3 25.9 27.5 RoCE (%) 32.4 35.6 23.4 27.1 29.2 Working capital & liquidity ratios Receivables (days) 24 53 37 32 27 Inventory (days) 19 24 28 19 19 Payables (days) 26 34 38 31 31 WC days 17 43 27 20 15 Current ratio (x) 1.7 2.1 2.5 1.9 1.7 Quick ratio (x) 1.2 1.5 1.8 1.5 1.2 Valuation ratios EV/Sales (x) 1.9 1.8 1.9 1.7 1.5 EV/EBITDA (x) 16.4 12.6 15.3 12.1 10.0 P/E (x) 24.1 20.5 26.1 19.7 16.4 P/BV (x) 8.0 6.3 6.3 5.4 4.8 Growth (%) Sales 14.2 7.7 (10.6) 12.9 16.3 EBITDA 27.6 31.9 (21.5) 27.7 22.1 PAT 36.2 17.2 (21.3) 32.3 20.4 3 Atul Auto
Apr-15 May-15 Jun-15 Jul-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 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 Rating track graph 650 600 550 500 450 400 350 Not Covered Covered 4 Atul Auto
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