Rating: Buy; Target Price: Rs640; CMP: Rs464; Upside: 38%
The GEM on three wheels
We initiate coverage on Atul Auto (Atul), the fastest growing
three-wheeler company, with a BUY and TP of Rs640. Atul should enjoy
continued market share gains in the domestic 3W market driven by wider
distribution reach and entry into the petrol segment, which accounts
for 1/3rd of the total domestic industry. Further, entry into the
petrol segment opens up huge export opportunity as addressable global
markets are largely petrol based. Valuations appear compelling,
considering 28% earnings CAGR over FY14-FY16E, superior return ratios,
healthy dividend payout and debt free status despite a large planned
expansion.
$ Gains driven by new launches and regional expansion: Atul’s market
share has steadily inched up, both in the passenger and cargo segments
even as the domestic 3W market remaining sluggish in the past 5 years.
We understand that several factors including 1) product introduction
at regular intervals (e.g. rear-engine 3W launch in 2009 was a key
inflection point), 2) Increase in distribution reach (190 dealers in
FY14 vs. 116 in FY11), and 3) Increase in installed capacity, helped
market share gains. Contrary to perception, Atul is already a
pan-India player and does not have to overspend simply to create a
national footprint.
$ Low cost of ownership – Atul’s USP, corroborated by dealers/buyers:
Our extensive interaction with dealers validates strong brand image
among users for Atul vehicles. They suggest that in the goods segment,
the company’s product Atul Shakti currently sells at a premium to
peers that buyers are willing to pay as the vehicle offers multiple
advantages, effectively leading to lower cost of ownership. After
establishing its name in the diesel segment, we expect Atul to stick
to its USP of low cost of ownership as it embarks on an entry into the
petrol segment.
$ Entry into petrol segment, the next growth engine: Atul plans to
enter the gasoline/alternate fuel segment, which constitutes 1/3rd of
the domestic 3W industry. This will also help the company enter the
large export market (almost equal to domestic market). The petrol 3W
project is now on track and the vehicle is likely to go for ARAI
testing in the next two months. Based on the current status, the
company is confident on its launch by Jan 2015. It has already
undergone 20,000 kms of testing and done well on all parameters.
$ Valuation and key risks: At the CMP, the stock currently trades at
11.0x/8.5x FY16E/FY17E EPS. We initiate Buy with TP of Rs 640. We have
valued the company at 13x one-year forward EPS as we believe that
strong earnings, 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 an icing. Key risks to our thesis are a)
Delay/failure of petrol powered 3W b.) Delay in capacity addition.
Thanks & Regards
The GEM on three wheels
We initiate coverage on Atul Auto (Atul), the fastest growing
three-wheeler company, with a BUY and TP of Rs640. Atul should enjoy
continued market share gains in the domestic 3W market driven by wider
distribution reach and entry into the petrol segment, which accounts
for 1/3rd of the total domestic industry. Further, entry into the
petrol segment opens up huge export opportunity as addressable global
markets are largely petrol based. Valuations appear compelling,
considering 28% earnings CAGR over FY14-FY16E, superior return ratios,
healthy dividend payout and debt free status despite a large planned
expansion.
$ Gains driven by new launches and regional expansion: Atul’s market
share has steadily inched up, both in the passenger and cargo segments
even as the domestic 3W market remaining sluggish in the past 5 years.
We understand that several factors including 1) product introduction
at regular intervals (e.g. rear-engine 3W launch in 2009 was a key
inflection point), 2) Increase in distribution reach (190 dealers in
FY14 vs. 116 in FY11), and 3) Increase in installed capacity, helped
market share gains. Contrary to perception, Atul is already a
pan-India player and does not have to overspend simply to create a
national footprint.
$ Low cost of ownership – Atul’s USP, corroborated by dealers/buyers:
Our extensive interaction with dealers validates strong brand image
among users for Atul vehicles. They suggest that in the goods segment,
the company’s product Atul Shakti currently sells at a premium to
peers that buyers are willing to pay as the vehicle offers multiple
advantages, effectively leading to lower cost of ownership. After
establishing its name in the diesel segment, we expect Atul to stick
to its USP of low cost of ownership as it embarks on an entry into the
petrol segment.
$ Entry into petrol segment, the next growth engine: Atul plans to
enter the gasoline/alternate fuel segment, which constitutes 1/3rd of
the domestic 3W industry. This will also help the company enter the
large export market (almost equal to domestic market). The petrol 3W
project is now on track and the vehicle is likely to go for ARAI
testing in the next two months. Based on the current status, the
company is confident on its launch by Jan 2015. It has already
undergone 20,000 kms of testing and done well on all parameters.
$ Valuation and key risks: At the CMP, the stock currently trades at
11.0x/8.5x FY16E/FY17E EPS. We initiate Buy with TP of Rs 640. We have
valued the company at 13x one-year forward EPS as we believe that
strong earnings, 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 an icing. Key risks to our thesis are a)
Delay/failure of petrol powered 3W b.) Delay in capacity addition.
Thanks & Regards
