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Tuesday, September 9, 2014

Atul Auto Ltd: Our 3-Bagger Stock in 6 Months - ROI @ 195%

Dear Reader,

We are pleased to inform you that our Hidden Gem stock of Feb'14 - Atul Auto Ltd (BSE Code: 531795, NSE Code: ATULAUTO) has made life time high of Rs. 836.35 today and closed at Rs. 820 giving returns of 195% in short span of 6 months. Our team suggested Buy on Atul Auto Ltd at price of 282.50 on 28th Feb'14. Atul Auto has given excellent returns and become a 3-Bagger stock for our members in period of 6 months.

Today, Atul Auto Ltd has informed BSE that the Company has been exploring various options for capacity expansion. As a part of expansion strategy, the Company has identified approx. 70 Acres of agriculture land near Bavla in Ahmedabad district (Gujarat). Further, the Company has acquired approx. 34 Acres of land of total area of approx. 70 acres considering the upward momentum of growth of business.

Moreover, board of directors of the company on 26th June has approved the sub-division of equity shares, and equity share of the company of the face value of Rs. 10/- each, shall be sub-divided into two equity shares of face value of Rs. 5/- each, record date of stock split is 15th Sept'14. 

Stock split is a good decision by the management as it will increase the liquidity of share with rise in trading volumes going forward.

In April-June quarter (Q1FY15), company reported a 125.6 percent growth in net profit at Rs 9.7 crore in  supported by other income and revenue. Total volume sales in April-June quarter increased by 11.4 percent at 8,433 units compared to 7,568 units in the year-ago period. Net sales grew by 16 percent on yearly basis to Rs 99.2 crore in the quarter ended June 2014 from Rs 85.5 crore in same quarter last fiscal driven by strong sales growth.

We suggest our members to continue to hold Atul Auto in their portfolio from medium to long term perspective considering company's expansion plans, growth visibility and prudent management.

Below is the summary of Atul Auto Ltd shared by our team under Hidden Gem stock recommendation - 28th Feb'14

1. Company Background

Atul Auto Ltd is a leading manufacturer of 3-wheeler commercial vehicles in the state of Gujarat and now gradually spreading its wings across India.
The Company manufactures 3-wheelers in the sub 1 tonne category targeting the passenger and cargo segments. In passenger segment, the Company manufactures the Diesel & CNG powered carriers for carrying 3 to 6 passengers. In the cargo segment, the Company manufactures vehicles with a rated carrying capacity of 0.50 tonnes. Both these vehicles have been approved by the Automotive Research Association of India under the Bharat Stage-III norms. It also provides customized vehicles like tippers, hydraulic hoppers, vegetable vending vans etc. and these vehicles find wide application in courier services, industrial products, laundry, construction, dairies, caterers, FMCG distribution, LPG distribution etc.

Company manufactures 3-wheelers under Atul Shakti, Atul Smart, Atul Gem and Atul Gemini-DZ product names.

The Company has its plant at Village Shapar at a distance of 18 kms from Rajkot. The plant commenced its commercial production from July 1992 and the present installed capacity is 48000 vehicles (from April 2013) per annum.

In the last few years the company has improved its market position in the domestic 3- wheeler industry with incremental market share in the 0.5 tonnes goods as well as passenger carrier segment (third largest player in 0.5 T three wheeler industry) by expanding its distribution network beyond Gujarat, increasing its capacity and by launching new products.

The company has 150 exclusive dealers, more than 100 sub-dealers, 14 regional offices and 3 training centers in 16 states of India.

2. Recent Developments

i) Atul Auto strikes big with dream run in smaller cities – 28th Feb’14 

Atul Auto, one of India's leading three-wheeler makers, was struggling to maintain its monthly run rate of 1,000 units till 2009, and was dismissed as a fringe player, whose presence was largely restricted to Gujarat. 

But it all changed for the company after it started making rear mounted engines for three wheelers and focused on tier-II and tier-III cities. The company now commands a market share of 7.3 per cent as on November 2013 against less than 1 per cent five years ago, and has posted an average volume growth of 17 per cent in trailing four quarters compared with industry's 2 per cent. 

"We are expecting volume growth of 20-25 per cent for the next year, while the industry growth will be around 6-8 per cent y-o-y. The low base effect, reaching out to untapped markets, and increasing dealer footprints would drive our volume growth," said JJ Chandra, CMD of Atul Auto. "We are increasing our dealer base to 250 by FY15 end from 179 now, and new dealers are largely going to focus on markets beyond Gujarat and Rajasthan." 

With the bigger players catering to urban markets, Atul Auto saw opportunity in tier-II and -III cities and built its strategy around them. For instance, it customized its products to meet the expectations of smaller cities and rural areas. The customization included capacity to bear overloading, higher mileage of 35 a litre and a warranty of 24 months against 14-16 months offered by competition. 

The strategy worked for Atul Auto as sales started trickling in from other states other than Gujarat - the western state now contributes 40 per cent to its sales compared with 100 per cent about five years ago. States like Kerala and Assam contribute 7 per cent to its sales now, and the company is planning to make inroads into West Bengal and Tamil Nadu. 

Atul Auto invested Rs 12 crore to increase its installed capacity to 48,000 units a year from 24,000 units a year in Rajkot. It is now building a new facility in Ahmedabad with an investment of Rs 100 crore, which would add another 60,000 units a year which will be ready in the next 18-24 months. The capital expenditure would be funded by internal accruals and the balance sheet is likely to remain debt free. 

Post the Ahmedabad facility, the company is exploring the opportunity to increase its export share, where realisations are higher. The company is in discussions with several distributors in Africa. 

ii) Atul Auto plans new production facility with 50k annual capacity – 08 Dec’13 

Rajkot based three-wheeler maker Atul Auto Limited is planning to set up new production unit of around 50,000 units per annum (pa) with an investment of around Rs 100 crore. This would more than double the company's existing capacity. 

"While the entire industry is experiencing negative growth, we are growing. Considering the potential in the Indian market, as well as opportunities in the overseas business, Atul is considering to expand its production capacity," said Niraj Chandra, director of Atul Auto. At present, Atul Auto's management and technical team is studying the various aspects of the project. The company is planning to have a production unit with a capacity of around 50,000 units pa. The company did not wish to specify a time-frame for the project. Chandra added, "It is difficult to talk about a specific location, but our first preference is Gujarat as we belong to this area. However, we are not closed to considering other states as options. Final decision will be taken after our project team finishes their work." 

Earlier, during this financial year Atul has already doubled its production capacity from 24,000 units pa to 48,000 units pa at its Rajkot factory with an investment of about Rs 30 crore. For new expansion the company is planning to invest about Rs 100 crore. At the new unit, company will continue to produce our existing models. Moreover, Atul Auto plan to introduce new models too. Atul Auto is also planning to introduce a petrol model of Atul Gemini by end of March 2014. 

At present AAL exports are negligible, but there is huge potential in the under-developed or developing countries like India where reasonable transportation is an issue. Atul Auto is currently exporting in five African countries including South Africa and Kenya. It is also exporting in Bangladesh under a technical tie up. The company has planned to invest in Sri Lanka and already proposal for that has been filed to Sri Lankan government in 2012. 

iii) Entering in new geographies and expanding distribution network 

Atul Auto has been expanding its distribution network for the past few years. Expansion in dealer network in new states has also enabled the company to grow above industry rate with an increase in market share from 2.64% at the end of Mar’07 to 3.81% at the end of Mar’13. Going forward, the Company is going to explore new geographies coupled with new product offerings in the pipeline and anticipated increase in the capacities. Another interesting fact is that Raamdeo Agrawal of Motilal Oswal, who made a lot of money from his multibagger stock picks like Hero Honda and SBI, has bought 1 lakh shares of Atul Auto at Rs. 260 each on 5th Nov’13

3. Saral Gyan Recommendation (as on 28th Feb'14)

1. Sales turnover of the company have grown by almost 200% in the last 4 years and operating margins have expanded from 4-6% to around 9-11% leading to much higher growth in profitability. The company has further transformed from a regional player with a strong foot hold in Gujarat and Rajasthan to a pan-india player.

2. During H1 FY14, the 3 wheeler industry has witnessed a volume de-growth and the major players like Bajaj Auto and Piaggio de-grew in sales volume whereas Atul Auto Ltd registered a growth of 18.9% YoY to 17,144 units. AAL continue to outperform its competitors, it has delivered volume growth of above 18% in Jan and Feb’14 whereas domestic sales of 3 wheeler in India is still witnessing de-growth. The company expects to register a volume growth of 50,000 units in FY15 as against 32,040 units achieved during FY13 and 17,144 units in H1 FY14.  

3. Company has made entry into new geographies within India but it still it has a long way to go as its base in other states is still very small. Moreover, company is also focusing on exports with plans to launch new models. As per ICRA research exports will be the fastest growing segment for the Indian 3 wheeler industry. In order to cater to the same, Atul Auto has developed a 0.35 tonne passenger carrier. We believe that company continue to outperform and will deliver volume growth of > 20% for next 2 - 3 years.

4. Management is now looking aggressive to continue grab domestic as well as exports market share for its products with expansion in distributor network. Company is increasing its dealer base to 250 by FY15 end from 179 now, and new dealers are largely going to focus on markets beyond Gujarat and Rajasthan. The company is planning to make inroads into West Bengal and Tamil Nadu. Exports sales is also expected to augur well for the company as currently contribution of exports is less than 2%.  

5. The company is currently working on establishing a second plant at Ahmedabad which is expected to begin production in FY 16, the new plant would also have a capacity of 48,000 units and would require an initial capex of Rs. 800 – 1000 million which would be primarily be funded through internal accruals and the balance sheet is likely to remain debt free.

6. On the bottom-line front, from last 5-6 quarters the company is continuously reporting operating margin improvement due to lower material cost and effective cost management strategy. Going forward, we believe that the company would improve its volume growth aided by capacity expansion, setting of an assembly plant in Sri Lanka, increasing dealership network in India and focus on exports.

7. Management has rewarded shareholders by paying consistent dividends since last 4 years. Atul Auto has distributed 25% of its net profits in form of dividends. During the same period, company repaid its debt and is now a debt free company. Dividend yield at current market price is above 2. Company also issued bonus share to shareholders in 2012 at the ratio of 1:2 and right issue in 2011 at Rs. 30, however the stock at that point of time was close to Rs. 100. This clearly shows that company’s management is prudent and is good towards the interest of minority shareholders.

8. On equity of Rs. 112 million, the estimated annualized EPS for FY 14-15 works out to Rs. 30.8 and the Book Value per share is Rs. 82.3. At current market price of Rs. 282.50, stock price to book value is 3.43. As per our estimates, Atul Auto Ltd can deliver bottom line of 345 million for full financial year 2014 – 15, with forward P/E ratio of 9.1 X for FY 2014-15, which makes stock an attractive bet at CMP.

Considering reasonable valuations and opportunities in domestic & export markets, we find Atul Auto Ltd an attractive pick. Saral Gyan Team recommends “BUY” on Atul Auto Ltd. for a target of Rs. 480 over a period of 12-24 months.

Buying Strategy:
  • 60% at current market price of Rs. 282.50
  • 40% at price range of Rs. 220 – 240 (in case of correction in stock price)
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Team - Saral Gyan.
Saral Gyan Capital Services.