Growth coupled with margin expansion! • Atul Auto :: ICICI Securities

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Growth coupled with margin expansion!
• Atul Auto’s earnings came in largely on expected lines with topline at
~| 139 crore, up ~13% YoY, aided by ~10% YoY volume growth to
~11800 units. ASPs rose ~2.5% YoY on back of richer product mix
• Margins at 12.7% increased ~70 bps YoY, coming in higher than our
estimates on the back of improving gross margins
• PAT at | 11.4 crore was in line, up ~11% YoY, slightly lower thanhigher
than estimated tax rate
Volumes to rise as geographical reach, distribution network increase!
Atul Auto’s growth trajectory has been impressive with volumes growing
at ~40% CAGR in FY09-14 even as the domestic three-wheeler (3-W)
segment has grown at ~7% CAGR over the same period. Volumes have
been improving on the back of added dealerships and increasing
geographic presence along with market share gains in existing markets.
Atul’s volumes have grown in both the passenger and goods carrier
segments where it has benefited from the launch of its rear-engine
vehicle Atul Gem in 2009, which has helped to serve a wider audience.
Currently, Atul is present in nearly all states barring Tamil Nadu and West
Bengal. Also, the dealer network comprises 200 primary dealers and
~125 sub-dealers across the country. The management has guided that
the number of primary dealerships will rise to ~300 by the end of FY17E.
This would help meet Atul’s aspiration of ~ 20% volume growth.
New products lined up to cater to new market segments, aid market share
Atul has attained a pan-India presence over the past three or four years,
establishing its brand in these new markets and gaining market share,
which has grown from 2.0% in FY09 to 7.7% in FY14. However, one of
the major shortcomings of Atul has been the lack of petrol/alternate fuel
engine products, which is ~40% of total domestic 3-W market. With the
management guiding that the new petrol engine product will be launched
in the next six months, we believe Atul’s volumes are likely to grow
faster. The petrol product is also likely to boost export volumes with the
management expecting exports to grow exponentially on a low base.
New capacity to come in H2FY17E, big export story leg remains intact!
In a segment that offers little scope for product differentiation, Atul has
been able to carve out a niche for itself focusing more on providing good
after-sale service and product customisation. The continued volume
growth and product acceptance is now expected to lead to doubling of
capacity. This facility would be focusing on export demand, which the
company expects to significantly rise as it competes with a complete
diesel/petrol portfolio. The facility is likely to be fully operational by
H2FY17E. Capex requirement for the project is likely to be ~| 150 crore,
to be funded through internal accruals.
Strong earnings growth, attractive PEG, robust ratios justify valuations
We feel Atul’s specialised focus has clearly paid rich dividends as
evidenced by market share gains. We believe that with further capacity
addition and new petrol product launch, Atul can efficiently tap export
markets along with urban markets in India and, thereby, continue the
strong growth momentum. The sharp rally in stock price over the past
two years has reflected the same. However, looking at the strong growth
potential coupled with strong balance sheet and robust return ratios
(>40% RoCE), we believe valuations at ~17x FY17E EPS remain attractive
relative to growth. We value Atul Auto at 20x FY17E EPS (~0.5x PEG
CAGR FY14-17E) to arrive at a target price of | 800 and maintain BUY.

LINK
http://content.icicidirect.com/mailimages/IDirect_AtulAuto_Q3FY15.pdf