Scale benefits playing out ; retain Buy on Atul Auto :: Centrum

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Rating: Buy; Target Price: Rs495; CMP: Rs400; Upside: 23.6%



Scale benefits playing out ; retain Buy



We retain Buy on Atul Auto (Atul) with revised TP of Rs495. 2QFY15
operating results reflect the benefits of operating leverage playing
out with EBITDA margins at 12%, better than our estimate of 11.4%.
Further, gross margins at 24% leave enough head room for improvement
given its peer in this segment commands gross margins of ~30-35%.  The
company continues to expand its dealership network with total touch
points now at 316. Given its current scale, we believe that
penetration will be largely over and focus would be on optimizing new
dealerships from FY16E. The petrol 3W project is on track and the
vehicle is likely to be launched by 4QFY15.

$ Operating leverage benefits kick in: Atul’s growth momentum
continued with YoY revenue growth of 20.4% at Rs1,313mn. ASP at
Rs117,911/unit grew 4%YoY and 0.3%QoQ. EBITDA margins stood at 12% vs.
our estimate of 11.4%, an improvement of 153bps YoY, while EBITDA/unit
stood at Rs14,214. Driven by strong revenue growth and better
operating performance, adjusted PAT stood at 110mn, beating our
estimate by 14%. The company has achieved its highest ever market
share of 17.4% in the domestic 3W goods segment reinforcing our
confidence in product’s acceptance and ability to gain market share.

$ Dealer expansion continues, consolidation phase from FY16E: Dealer
addition continues with primary dealers now at 198 vs. 180 in FY14 and
secondary dealerships at 118. The company now has 316 touch points
(303 in 1QFY15). Post launch of the Petrol vehicle, the company plans
to penetrate Tamil Nadu and West Bengal (which now account for only 5%
of the total domestic 3W volumes). The current expansion of dealers is
in states where it is already present but is under represented when
compared to peers. By end FY15, the company is targeting 240/150
primary and secondary dealers, taking the total touch points to 390.

$ Estimate revision: We are revising our earnings upwards by 3.3%/5.9%
each for FY15E/FY16E driven by better than expected operating
performance in 2QFY15. It is encouraging to note that 4QMA EBITDA/unit
for the company during the quarter stood at Rs12,909, the highest in
the last 14 quarters reflecting an inch up in EBITDA margins with
scale benefits playing out. Further interaction with new dealerships
set up in FY14 indicates strong traction for Atul vehicles and
positive feedback from customers.

$ Valuation and Recommendations: Retain Buy with a revised TP of Rs495
to factor in earnings revision and roll forward to FY17E from earlier
September 2016. We now value the company at 16x FY7E EPS as we believe
that our investment thesis both in terms of market share gains and
operating leverage benefits is playing out. Strong earnings, healthy
return ratios and the ability to generate free cash flow can lead to
further re-rating of the stock, with further market share gains, if
any, adding to the icing. Key risks to our thesis are a) Delay/failure
of petrol powered 3W b.) Delay in capacity additions.



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