Atul Auto Ltd

- High Growth company with Attractive Fundamentals

Content Index
Atul Auto Limited Investment Snapshot :- Slide #3
Industry Opportunity An Overview:- Slide #5

Atul Auto Limited Business Overview :- Slide #10

Investment Rationale :- Slide # 17
Atul Auto Limited Financials:- Slide #24
Concerns & Reasoning :- Slide #26
Conclusion :- Slide #29

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Atul Auto Ltd Investment Snapshot

(as on May 30, 2013)
Recommendation :- BUY
o

Maximum Portfolio Allocation :- 3-4 %

Investment Phases & Buying Strategy
1st Phase (Now) of Accumulation :- 70%

Current Market Price Rs.184.90

Current Dividend Yield 3.28%
Bloomberg / Reuters Code ATUL.BO/
ATA.IN

Current Accumulation Range :- 160-185 Rs

BSE / NSE Code 531795 / ATULAUTO
Atul Auto is a typical Small Cap stock, where the Business is
trying to grow aggressively from a low base in a Large Industry.
While Risks continue to be there, the past 3 years of
performance gives us more conviction in buying the stock.

Core Investment Thesis :

The Size of the Opportunity is large and the Business is less capital
Intensive with good Return Ratios, thereby enabling an Investor to
earn disproportionate Returns if the company is able to
execute its Growth plan. This along with an Opportunity to buy a
company with good Near term track record at cheap valuations will
help us earn Multibagger returns.

Market Cap (INR BN / USD Mn) 203

/33.83 [1 USD Rs. 60]
Total Equity Shares [Mn] 11.2

Face Value Rs. 10

52 Week High / Low Rs. 191 /
Rs.160.05
Promoters Holding 56.62 %
Institutional Holding 0.11 %
Other Holdings
- 43.27%

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Key Investment Highlights

Rising Market Share :- Company since the launch of its RE backed product, has been able to consistently grow
faster than the Industry. Even during the tough economic environments of the last 2 years, Atul Auto has grown well.
The Companys market share has increased almost 10X over the last decade which is huge, albeit from a low base.

Large Opportunity :- Even after the strong Growth of last few years, Atul Auto still occupies a Market Share of less
than 15% across all segments. The Market opportunity is big enough for the company to grow consistently for the next
several years, just by deeper penetration and plugging voids in the Product portfolio.
Et

High ROE business :- The Industry is not Capital Intensive and considering the High Capital Asset turnover of the
Business, Atul Auto will continue to be a High ROE business despite the temporary fluctuations in Margins. Companys
current RONW of over 30% will only improve going forward.

Ambitious Growth Plans :- Atul Auto has very ambitious Growth plans which can be seen from the aggressive
Capacity expansions. While the current capacity itself is over 5X the companys sales in 2009, it has already started
planning to double the capacity over the next few years.

Strong Balance Sheet :- Atul Auto has a clean Balance sheet with no Debt and little complexity. The Working Capital
management is tight leading to strong Cash Flow generation. This Balance sheet strength removes some of the Risks
associated with small companies in Cyclical sectors.

Good Management with track record :- Company has a good aggressive management which has rewarded
shareholders with liberal bonus and dividends. Apart from that the company disclosure policies are good enough with
little worries about the Corporate Governance part.

Strong Growth Levers :- With Macro Economic scenario expected to improve slowly over the next 2 years along
with increasing Rural Prosperity, we believe that strong 3-Wheeler sales are her to stay. Margin growth also has levers in
the form of Increasing Scale, Brand Visibility, Bargaining power with both Suppliers and Customers etc.
Compelling Valuations :- Despite the improving Fundamentals and strong performance over the past few years
which has decreased the Business Risk, the stock continues to trade at less than 8X trailing earnings allowing us to buy a
good growing business at cheap Valuations.

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Indian 3-Wheelers - Industry Overview

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Indian Auto Industry

Indias Auto Industry has been growing at a
CAGR of 17% from 1991 and is one of the
fastest growing market globally.
Even after this spectacular growth ,the
contribution of Indian automotive sector is low
when compared with global average.
The automobile sector contribution to GDP is
about 7% and is the key driver of the growth of
the economy.
The two wheeler segment dominates the auto
industry with a share of 76% and is the second
largest market in the world.
The share of three wheeler segment in the
Indian Auto space is increasing and this is likely
to continue given its smaller size which can
penetrate smaller streets.
The general health of the automobile Industry
is affected by the performance of the Indian
economys growth prospects.

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Overview of the three Wheeler Industry

India is the worlds foremost
producer, consumer and
exporter of three-wheelers
with domestic sales of about
5.13 lakh units in 2012.
Three wheelers are widely
used in India as an affordable
means of short to medium
distance public transportation
and last mile connectivity for
goods transportation.
Apart from the domestic
demand ,India has also
emerged as an important
export hub for three wheelers
with presence in some of the
South Asian ,African and Latin
American markets that are
replicating Indian growth story
with rising disposable incomes
but inadequate public
transportation system.

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Indian Three Wheeler Industry

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Competitive edge of 3 wheelers over 4 Wheeler SCVs

Particulars

Three Wheeler

Four Wheeler

Tonnage

0.3 to 0.5T

0.5 to 1.25T

Ex-showroom Prices

150000-180000

180000-400000

Downpayment+Insurance+Registration

Rs.55000-Rs.60000

Rs.65000-Rs.120000

Availability of Finance

Medium

High

Key Financiers

Commercial Banks &

Co-operative Banks NBFC's

EMI(Rs.Per Month)

Rs.4500-Rs.5000

Rs.5000-Rs.9500

Fuel Efficiency(Kms/Liter)

30-32

15-25

Monthly Fuel Cost(Rs)

Rs.2200-Rs.2500

Rs.3500-Rs.9000

Maintainence Cost per Month

Rs.900 to Rs.1200

Rs.1500-Rs.2250

Insurance Cost per Month

Rs.600-Rs.750

Rs.1250-Rs.1750

Other Operating Cost

Rs.500-Rs.750

Rs.750-Rs.1000

Toll charges & other Overheads

Rs.1000-Rs.1250

Rs.1500

Monthly Income per Month

Rs.18000-Rs.20000

Rs.25000-Rs.40000

Three wheelers are better

than 4 wheelers as they are
able to have a better access
due to its smaller structure
which enables it to connect
with smaller roads.

The three wheelers are better

for their service. The service of
a three wheeler is so simple
that even the driver can repair
it whereas a four wheeler has
to be serviced only in a
workshop.
The maintenance cost of a
three wheeler is negligible
when compared to a 4 wheeler
which increases maintenance
cost of the vehicle.
The resale value of three
wheelers is also better than
that of 4 wheelers.

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Atul Auto Business Overview

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Atul Auto A Snapshot

Atul Auto manufactures 3wheelers in the sub 1 tonne
category targeting the passenger
and cargo segment.
In passenger segment, the
Company manufactures the Diesel
& CNG powered carrier for
carrying 3 to 6 passengers.
The company has 150 exclusive
dealers and more than 100 subdealers in 16 states of India.
Company manufactures vehicles with a rated carrying capacity of 0.50 tonne. Both these vehicles have
been approved by the Automotive Research Association of India under the Bharat Stage-III. Company has
also been developing several new products.
Atul Auto commenced its commercial production from July 1992 and the present installed capacity is
48000 vehicles from April 2013.
The company has improved its market position in the domestic 3-wheeler industry with growing
incremental market share in the goods and passenger segment in the 0.5 Tonne segment.

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Strong Track Record

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Products
Atul Auto has consistently increased its Product
profile with the addition of several new products.
The company also has been able to work across
different Fuel segments including Petrol, Diesel and
LPG for its various products.
Atul Autos products are generally lighter and gives
better Fuel Mileage compared to competitors.
All products of Atul Auto are currently fitted with
engines manufactured by Greaves Cotton which
lends strong credibility to the product.
Company provides customized vehicles like tippers,
hydraulic hoppers, vegetable vending vans etc. The
vehicles find wide application in courier services,
industrial products, laundry construction, dairies,
caterers, FMCG distribution, &LPG distribution.

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Competitive Strength
Atul Auto is the only player in
the three wheeler industry with
standalone focus on this
segment as compared to its
rivals who are more focused on
other segments. This helps the
company to establish a unique
identity for itself apart from
bringing new products to the
market due to its focus on a
single segment.
The company products give a
higher mileage ,lower cost apart
from a 2 year warranty not
offered by any of its competitors.
The company has introduced
new vehicles in the CNG and LPG
segment which have a strong
demand in the market and are
likely to be the future growth
driver for the industry.

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Growing Brands
Majority of companys three wheelers are
sold under the brand names Atul Shakti,
Atul Gem and Atul Smart.
Atul Sakti, Atul Gem and Atul smart
(Loading) are suitable for carrying
transportation of small volumes of cargo
from transit station to main offices and vice
versa. Unique features of the vehicle include
auto ignition start, fuel efficiency etc.
Company has introduced different types of
vehicle to cater to the specific demand of
the customers like Pack Body Vehicles, Soft
Drink Carrier, High Deck, Chicken Carrier,
Hydraulic Tipper, Ice Cream shop, Hopper,
Water tank carrier and Open Box type body.
Atul Sakti, Atul Gem and Atul smart
(Passenger)has an approved capacity to
carry 3 passengers (excluding driver) or in
terms of pay load capacity it can carry 500
kgs while Gemini-Dz can carry 253 kgs.

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Distribution Reach
Company has about 150 dealers
with presence in 16 states and
this is likely to increase as the
company has planned to enter
into new geographies.
The Company has recently
signed an agreement to assemble
three-wheelers in Sri Lanka,
which would help bypass high
import duty rates.
Company plans to enter new
locations like Bihar, Jharkhand,
Orissa, Karnataka, Punjab,
Haryana and Tamil Nadu etc.
From the current presence in 16
states, the company aims to be
present in 20 states .

Company has plans to enter the

overseas markets and is looking
for exports to key markets like
Bangladesh, Middle East & Africa.

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Investment Rationale

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Key Highlights
Growth Opportunity
In a Market where over 3 Lakh vehicles
are sold in 3-Wheeler segment, the
scope for Atul growth is Huge.

Attractive Price
Considering that the Stock is quoting
at less than 4.5X Cash flow from
operations of 2013, the stock is
definitely cheap allowing both
Earnings Growth + P/E Re-rating.

Cash generating
Business
Atul Auto generates Solid Cash
flows which allows it to expand
using Internal Accruals without any
stress for Working Capital or Long
Term borrowings.

With a decent Product profile and

Focused strategy, market beating
growth should not be difficult.

Atul Auto

Margin Expansion
With Volumes growing, we
believe that EBIDTA Margins can
inch up slowly to over 13%
considering Economies of Scale
and subdued Commodity prices.

S Shaped Growth
The companys current S shaped
growth is a result of its RE product
launch in 2009. We believe that with
a new set of products in the 0.35
Tonne market, the company can
again move into a different Growth
orbit going forward.

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Huge scope for Revenue , EBITDA & PAT Growth

Atul Auto revenues have been growing strongly over the years and we expect this growth to continue on
the back of improved capacity utilization and expanded capacity apart from expansion in distribution
network across the country.
The company recorded EBITDA of Rs.28 Cr and Rs.40 Cr in FY12 & FY13 respectively and is likely to be
around Rs.45 Cr and Rs.50 Cr in FY14 and FY15 respectively.
The company reported PAT (in Crs) of Rs.16 and Rs.26 for FY12 and FY13 respectively and this is likely to
grow to about Rs.29 and Rs.32 in FY14 and FY15 respectively.

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Market Share Growth

Atul Auto has been consistently
increasing its market share over the
years due to its increase in capacity
and expanding operations in new
geographies.
Also dealership addition which helps
in increasing the penetration of its
products helps in growing its Market
share across different regions.
The company has increased its
market share in the passenger
segment from 3.72% in 2012-13 to
about 4.44% in 2013-14.
The company s market share in the
cargo segment has remained flat
from 15.90% in 2012-13 to about
15.75% in 2013-14. Companys market
share growth in the segment has
grown 10x over the years from a very
low base.

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Strong Financials

Company has a strong Cash

generating ability which can be seen in
its Working Capital movements. The
company has earned over 50 Cr last
year before tax.

Atuls Margins has been slowly

improving over the last few Quarters
and we expect the Trend to continue.

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Improving Cash Flows

Cash Flow Statement
Y/E March (Rs cr)
FY2012 FY2013 FY2014E FY2015E
Profit before tax
23
37
42
46
Depreciation
4
4
5
6
Change in Working Capital
-2
-8
-11
-9
Interest / Dividend (Net)
0
0
0
0
Direct taxes paid
-7
-11
-13
-14
Others
0
0
0
0
Cash Flow from Operations
18
22
23
29
(Inc.)/ Dec. in Fixed Assets
-6
-10
-12
-12
(Inc.)/ Dec. in Investments
-7
0
0
0
Cash Flow from Investing
-12
-10
-12
-12
Issue of Equity
4
4Inc./(Dec.) in loans
1
13
0
0
Dividend Paid (Incl. Tax)
-3
-3
-3
-3
Interest / Dividend (Net)
0
0
0
0
Cash Flow from Financing
2
14
-3
-3
Inc./(Dec.) in Cash
9
27
9
15
Opening Cash balances
3
11
38
47
Closing Cash balances
11
38
47
61

Atul Auto has a good positive

cash flow which reflects its
strength of its core business.
Atul Auto derives a major
part of its cash flows from
cash from operations which
underlines the robust cash
flow generation potential of
the business.
Atul Autos Free Cash Flow
per share in FY12 & FY13 was
Rs.8 and Rs.33.8 respectively.
We expect Free Cash Flow per
share of Rs.41.8 and Rs.54.3
for FY14 and FY15 respectively.

This Cash flow will help the

company to fund its plans for
growing the Business.

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Good and Capable Management

The company has a good and capable management apart from experience of the promoter family in the
auto business for about 35 years.
The company has inducted fresh blood with young and dynamic N.J.Chandra now looking after the
operations of the company. He was the person responsible for turnaround in the fortunes of the company
which resulted in the company gaining market share and increase in capacity expansion thereby driving
growth. This gives us more confidence about the future.
Apart from the above two the company s Independent director is V.K.Kedia who has about 25 years of
experience in finance and is one of the smartest Investors in Dalal street.

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Financials

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Earnings Projection
Profit & Loss Statement
Y/E March (Rs Cr)

Net Sales
% chg
Total Expenditure
Cost of Materials
Personnel Expenses
Other Expenses
EBITDA
% chg
(% of Net Sales)
Depre. & Amortisation
EBIT
% chg
(% of Net Sales)
Interest & other
Other Income
PBT (reported)
Tax
PAT (reported)
% chg
(% of Net Sales)
Fully Diluted EPS(Rs)
% chg

FY2012 FY2013 FY2014E

299
47.9
271
238
16
17
28
41.7
9.2
4
23
53.3
7.8
1
1
23
8
16
65.1
5.2
13.9
65.1

364
21.8
324
284
21
19
40
45.5
11
4
36
53.1
9.8
0
2
37
11
26
66.3
7.1
23.1
66.3

434
19.3
389
340
25
24
45
12.1
10.4
5
40
11.2
9.1
0
2
42
13
29
11.4
6.7
25.8
11.4

FY2015E

507
16.9
457
398
30
29
50
11.2
9.8
6
44
9.9
8.6
0
3
46
14
32
10.6
6.3
28.5
10.6

Atul Auto revenues have grown

at about 20%+ CAGR over the
past five years and we expect
revenues growth to be about
19.3% and 16.9% in FY14 and
FY15 respectively.
Atul Auto s EBITDA margins
have been around 10% and we
expect the EBITDA margins to
slowly improve going forward.

Atul Auto reported PAT margins

of about 5.2% and 7.1% in FY12
and FY13 respectively and is likely
to be around 6.7% and 6.3% in
FY14 and FY15 respectively.
These are highly conservative
estimates with a lot of scope to
be revised upwards.

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Concerns & Reasoning

1.) Increasing Cannibalization :
The 4W-SCVs have taken
significant Market share and we
dont expect them to gain. But still
the Risk remains considering the
deep pockets of many of these
4W-SCV manufacturers.

2.) Dependence on a single segment :

The company is dependent on a single segment namely three wheelers which are highly susceptible to
changes in GDP growth rates. Any slow down in the economy will eventually lead to poor demand for the
segment which will result in weakness in top-line and bottom-line growth.
3.) Intense Competition from Bigger Players:
Atul Auto is present in an industry which has leading players like Bajaj Auto , Piaggio etc who have higher
market reach and brand apart from strong distribution network across the length and breadth of the
country. Atul Auto was till recently confined to a single state namely Gujarat and is expanding its network
which may or may not be as envisaged by the company.

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Conclusion

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Price Chart

Share Holding
%

Mar
2013

Dec
2012

Sep
2012

Jun
2012

Promoters

56.62

56.62

56.62

60.81

FII

0.11

DII

Others

43.27

43.38

43.38

39.19

Atul Auto has been on a strong Upside over the last few

years. In fact the stock has doubled itself over the last 1
year when all Small cap stocks have been battered.
The Stock is on a strong Technical footing with Higher
Highs and Lower Lows, there by indicating more steam left
in its Bull run.
Institutional Interest has still not picked up in the share
and this can provide further boost to the share price as
people enter it over a period of time.

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Conclusion
This is a surprising pick at a time when most Small cap stocks are getting beaten down heavily. But we
believe that, Market conditions like these separates the Chaff from the Wheat and makes our job easier. In
spite of being a Small Cap company in a cyclical sector, we believe that the company has shown tremendous
resilience in its performance.

While the company has a bad track record in the early part of 2000s, we believe that the company has
improved structurally with changes in Management and a more robust Product portfolio. With an aggressive
team and so many low hanging fruits, we believe that the company would be able to maintain its Growth
momentum and can accelerate with supporting Macro conditions.
Company has also been launching new products and with increased Capacity and Dealer network, we
expect an all round improvement in Margins, Market Share, Revenues, Profitability etc. With a Management
which is Transparent and a Balance sheet which is strong, the company doesnt suffer from the problems
usually associated Small-cap stocks.
At the current Valuations of less than 4.5X Cash flow from Operations, <4X EV/ EBIDTA multiple and
around 8X trailing EPS its definitely attractive for a long term Investor. This allows for both Earnings
growth and Valuations expansion, potentially giving Multibagger returns. In spite of all these positives,
Investors should not take a big bet (>5% of Portfolio) considering the Inherent Risks and other High
conviction mouth watering stocks which are available.

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