20141120 Atul-Auto-Limited 27 QuarterUpdate

November 20, 2014

ICICI Securities Ltd | Retail Equity Research

Company Update

Makes room for next phase of growth! Atul Autos earnings came in largely on expected lines with topline at

~| 131 crore, up ~20% YoY, aided by 17% YoY volume growth to ~11000 units. ASPs also improved ~1% QoQ as mix improved

Margins at 12.0% increased ~240 bps QoQ and ~150 bps YoY but came in line with estimates

PAT at | 11 crore was up ~49% YoY, boosted by a lower-than-estimated tax rate

Volumes rise as geographical reach, distribution network increase! Atul Autos growth trajectory has been impressive with volumes growing at ~40% CAGR in FY09-14 even as the domestic three-wheeler 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. Atuls volumes have grown in both the passenger and goods carrier segments where Atul 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 190 primary dealers and ~110 sub-dealers across the country. The management has guided that the number of primary dealerships will rise to ~300 by the end of FY16E. This is likely to help meet the managements target 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 engine products, which is more in use in urban areas. With the management guiding that the new petrol engine product will be launched in the next nine to 12 months, we believe Atuls volumes are likely to remain on the uptrend. 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 on stream in FY17E, export story to start then! 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 FY17E. Capex requirement for the project is likely to be ~| 150 crore, to be funded through internal sources without resorting to debt. Strong earnings growth, robust financials + reasonable valuations = BUY We feel Atuls 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 ~11x FY17E EPS remain very attractive. We value Atul Auto at 15x FY17E EPS (~0.4x PEG CAGR FY14-17E) to arrive at a target price of | 564 and recommend BUY.

Atul Auto (ATUAUT) | 410 Rating matrix

Rating : B uyTarge t : | 564

Targe t Per iod : 12 monthsPotent ial Ups ide : 38%

Whats changed?

Target Changed from | 350 to | 564

EPS FY16E Changed f rom | 25.0 t o | 27.5EPS FY17E Introduced at | 37.6Rating Unchanged

Quarterly performance (| Crore) Q2FY15 Q2FY14 YoY (%) Q1FY15 QoQ (%)

Revenues 131.3 109.0 20.4 99.7 31.6EB ITDA 15.8 11.4 37.9 9.6 65.0

EB ITDAM (%) 12.0 10.5 152 bps 9.6 243 bpsPAT 11.0 7.4 48.6 9.7 13.4

Key financials

| Crore FY14 FY15E FY16E FY17ENet Sales 429 530 651 832

EB ITDA 45.4 62.9 86.0 117.4 Net Profit 29.8 45.9 60.3 82.5 EPS (|) 13.6 20.9 27.5 37.6

Valuation summary

FY14 FY15E FY16E FY17E

P/E (x) 30.2 19.6 14.9 10.9 Target P/ E (x) 41.5 26.9 20.5 15.0

EV/EB ITDA (x) 18.8 14.2 10.4 7.1 P/BV (x) 9.5 7.4 5.3 3.9 RoNW (%) 31.6 37.9 35.8 36.2

RoCE (%) 42.5 47.0 46.8 47.4

Stock data Particular Amount

M arket Capit alization (| Crore) | 899.5 CroreTot al Debt (FY14) (| Crore) | 0 Crore

Cash & Investments (FY14) (| Crore) | 45 Crore

EV (| Crore) | 854.5 Crore52 week H / L (|) 446 / 132

Equity capital (| crore) | 11 CroreFace va lue (|) | 5

Price performance

1M 3M 6M 12M

Atul Auto Ltd 19.3 15.9 112.2 189.0

Bajaj Auto Ltd 12.7 21.7 42.4 32.8

TVS Motor Company Ltd 3.1 31.0 94.1 370.1 Analyst

Nishant Vass

[email protected]

Venil Shah [email protected]

ICICI Securities Ltd | Retail Equity Research Page 2

Variance analysis Q2FY15 Q2FY15E Q2FY14 YoY (%) Q1FY15 QoQ (%) Comments

Total Operating Income 131.3 129.8 109.0 20.4 99.7 31.6 Performance in line with estimates driven largely by volume growth Raw Material Expenses 99.5 98.2 84.1 18.3 75.9 31.0

Employee Expenses 8.2 8.0 6.9 19.6 8.0 2.9

Other expenses 7.8 8.2 6.6 17.9 6.3 24.1 Lower-than-expected other expenses leading to better margins

EBITDA 15.8 15.4 11.4 37.9 9.6 65.0

EBITDA Margin (%) 12.0 11.9 10.5 152 bps 9.6 243 bps

Other Income 0.9 0.8 0.6 41.3 5.6 -84.0 Lower on a QoQ basis as last quarter had seen recovery of bad debt to the tune of ~| 3 crore

Depreciation 1.4 1.5 1.3 4.6 1.5 -11.7

Interest 0.2 0.1 0.2 4.5 0.1 109.1

Tax 4.1 4.4 3.2 29.4 4 7.9

Reported PAT 11.0 10.2 7.4 48.6 9.7 13.4

EPS 5.0 4.6 3.4 48.6 4.4 13.4

Key Metrics

ASPs (| '000s) 118,774 117559 113,534 4.6 117,598 1.0 Continued rise in ASPs

RM/Unit (| '000s) 89,710 88,594 87,803 2.2 90,027 -0.4

Source: Company, ICICIdirect.com Research Change in estimates

(| Crore) Old New % Change CommentsRevenue 655 652 -0.4 833 New capacity to come on-stream in FY17E

EBITDA 82 86 5.4 117 Strong operating profits on the management's cost reduction plan coupled with benefit of operating leverage

EBITDA Margin (%) 12.5 13.2 72 bps 14.1 Margin expectation increases on higher growth in volumes led to operating leverage benefits coupled with cost cutting initiatives taken by the management

PAT 55 60 10.1 83

EPS (|) 25.0 27.5 10.1 37.6

FY16E FY17E

Introduced

Source: Company, ICICIdirect.com Research Assumptions

Current Earlier CommentsFY14 FY15E FY16E FY17E FY16E FY17E

Domestic volumes 37,007 43,356 51,526 63,022 51,067 N.A. Volumes to continue to grow on the back of increase in distribution network and improved demand scenario

Export volumes 550 1,461 2,839 3,876 1,724 N.A. Export volume growth assumed as per the management guidance ASPs (|) 114,346 118,183 119,772 124,364 120,881 N.A. ASPs to trend higher as export contribution improves and improved demand

scenario enables price hikes

RM/vehicle (|) 88,250 90,023 90,013 93,236 93,526 N.A. Likelihood of raw material prices to remain on an uptrend EBITDA/vehicle (|) 12,086 14,026 15,814 17,542 14,370 N.A. Benefit of scale to start accruing as utilisation levels reach ~100% in FY16E

before the new facility is commissioned

Source: Company, ICICIdirect.com Research


Key conference call takeaways

The management has maintained the guidance for growth for the

next couple of years. New capacity is likely to come on stream from FY17E onwards

The management has guided that the dealer network expansion

will continue with ~50 new dealers likely to be added in FY15E. The current touch points count stands at ~300 with dealers at ~200

For the new plant in Gujarat, 54 acres of land has been acquired

and the project is expected to start soon. The expected capex for the same is ~| 150 crore, which would be funded largely through internal accruals

The management has indicated that the export segment is likely

to witness strong volume growth in the coming years with six distributors established in Kenya, Mozambique, Bangladesh, etc. The management has maintained its target of ~1500 units for FY15E

The management has guided that the new petrol engine product

is likely to be launched in the next six months, which would lead to Atuls entry in urban as well as export markets

The current facility can be expanded from 48,000 units to ~60,000

units by carrying out the de-bottlenecking activity


Company Analysis Revenues to grow as volumes remain on uptrend

Atul Auto is the only pure play 3-W manufacturer in India. With ~17% share in the goods carrier segment and 5.5% share in the passenger carrier segment, Atul has reached a respectable size in the market. Atul has also gone pan-India with a presence across almost all states. We expect volumes to remain on the uptrend as the market share increases in newly launched markets. Also, the new petrol engine variant to be launched next year is likely to add incremental volumes as Atul targets urban markets for growth. We build in revenue growth at ~25% CAGR in FY14-17E as volumes grow at ~21% CAGR in the same period. Exhibit 1: Growth in revenues driven largely by volume growth

201.

6

298.

3

362.

9

429.

5

529.

7 651.

1 832

.0

18.423.3 22.9

27.8

48.0

21.6

69.1

100

200

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FY11 FY12 FY13 FY14 FY15E FY16E FY17E

(| c

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(%)

Net Sales Growth (%)


Exhibit 2: Segmental volumes dominated by goods carrier segment!!!

1051

1

1391

6

1726

4

2164

0

7330

8895

1308

4 1477

3 159

17

50157153

4350

-

10,000

20,000

30,000

40,000

FY09 FY10 FY11 FY12 FY13 FY14Passenger Carriers Goods Carriers


Atuls main forte has been the rural markets, especially the

large diesel segment, which is a ~2.5 lakh strong market.

Atul has a significant market share in the goods carrier

segment in which it is a strong player


Exhibit 3: Market share movement over the years

1.4

2.4

3.43.9

5.5

1.0

8.2 8.8

12.2

15.216.7

5.5

-

1.0

2.0

3.0

4.0

5.0

6.0

FY09 FY10 FY11 FY12 FY13 FY14

(%)

0

3

6

9

12

15

18

(%)

Passenger Carriers Goods Carriers


EBITDA margins to improve from current levels on operating leverage Despite continued volume growth, Atuls margins have remained largely subdued over the past two years as conversion costs have been high and the sluggish market scenario has prevented OEMs from passing on costs. Going ahead, we believe with an improvement in sentiment, demand pick-up will encourage OEMs to take price hikes. Also, with a further improvement in utilisation levels, operating leverage benefits are likely to accrue and aid margins. Thus, we believe margins will trend higher and grow to 13.2%, 14.1% in FY16E, FY17E, respectively. Exhibit 4: Margins trends and forecasts

19.4

27.5 40

.1

45.4 6

2.9 8

6.0

117.

4

10.6

11.9

13.2

14.1

9.2

11.0

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0

20

40

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80

100

120

140


(| c

rore

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8

9

10

11

12

13

14

15

(%)

EBITDA EBITDA Margin (%)



Exhibit 5: Net ASPs to trend higher as product/geography mix improves

103,872

110,480113,252 114,346

118,183119,772

124,364

90,000

95,000

100,000

105,000

110,000

115,000

120,000

125,000

130,000

FY11 FY12 FY13 FY14 FY15E FY16E FY17E(|

)ASPs (|)


Profitability to improve as volumes and margins increase!!! Profitability is likely to remain on an uptrend as the management focus on growing profitably remains intact. With increasing volumes and an improvement in margins, profitability is likely to remain on an uptrend. We expect PAT to increase at ~35% CAGR in FY14-17E mainly as capacity utilisation improves leading to margin expansion. Exhibit 6: Increase in profitability as financial performance improves!

9.4

15.6 2

5.9

29.8

45.9 6

0.3

82.5

15.0

54.0

31.336.8

64.8 66.6

107.5

0

10

20

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50

60

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80

90


(| c

rore

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-

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120

(%)

PAT Growth (%)



Capex to be funded by strong CFO generation Atul possesses strong balance sheet strength, with zero debt on the books. For the major capex planned in FY15E, FY16E, the management has guided at meeting the capex need by using existing cash as well as CFOs. We believe that in the next two years, with CFO generation likely to remain robust as the demand scenario improves, Atuls debt-free status is likely to sustain. Exhibit 7: Major capex to be funded by strong CFOs.to retain debt-free status

10.0

27.5

55.6

27.0

57.6 7

0.9

94.2

37.8 45

.0

9.4

63.2 8

1.1

68.075

.0

3.8 3.3

11.3

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11.4

1.4

0

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(| c

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Capex CFO Cash & Equivalents


Return ratio improvement reflects overall improvement in financials Despite the planned capex in FY15E, FY16E, due to an improvement in profitability, return ratios are likely to remain on an uptrend. We believe return ratios are likely to remain at current levels and expect RoE, RoCE to remain above 40%, 30%for FY15E, FY16E, respectively. Exhibit 8: Return ratios to remain buoyant!!

35.0

23.4

46.847.042.548.0 47.4

38.8

27.8

34.931.6

37.9 35.8 36.2

0

10

20

30

40

50

60


(%)

RoCE RoE



Outlook & valuation We feel Atuls specialised focus has clearly paid rich dividends as evidenced by market share gains. We believe with further capacity addition and new petrol product launch, Atul can efficiently tap export markets along with urban market 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 ~11x FY17E EPS remain very attractive. We value Atul Auto at 15x FY17E EPS (~0.4x PEG CAGR FY14-17E) to arrive at a target price of | 564 and recommend BUY. Exhibit 9: Two-year rolling forward P/E

0100200300400500

600700800900

1000

Apr-0

7

Oct-0

7

Apr-0

8

Oct-0

8

Apr-0

9

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(|)

Price 25.5x 22.5x 13.4x 1.2x 10.3x 7.3x


Exhibit 10: Valuations

Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE

(| cr) (%) (|) (%) (x) (x) (%) (%)FY14 429.5 44.0 13.6 91.7 30.2 18.8 31.6 42.5

FY15E 529.7 23.3 20.9 54.0 19.6 14.2 37.9 47.0

FY16E 651.1 22.9 27.5 31.3 14.9 10.4 35.8 46.8

FY17E 832.0 27.8 37.6 36.8 10.9 7.1 36.2 47.4


The sustained improvement in performance has seen a re-

rating of the multiples. We believe with increasing visibility

of earnings, multiples are likely to remain on an upward

trajectory


.

Financial summary Profit and loss statement | Crore( Year- end M arch) FY14 FY15E FY16E FY17E

Tot al Volumes ( Units ) 32,040 37,557 44,817 54,365

Tot al operating Income 430.3 531.3 652.3 833.4

G r owt h ( %) 18.3 23.5 22.8 27.8

Raw Mat erial Expens es 331.4 403.5 489.4 623.7

Employee Expenses 27.3 33.1 37.6 43.3

O t her Expenses 26.2 31.8 39.4 49.0

Tot al Opera ting Expenditur e 385.0 468.4 566.3 716.1

EB ITD A 45.4 62.9 86.0 117.4

G r owt h ( %) 13.2 38.5 36.8 36.5

D epreciat ion 5.2 5.9 7.0 9.2

Inter est 0.3 0.5 0.4 0.4

O t her Income 2.9 8.2 6.1 6.9

PB T 42.8 64.7 84.6 114.6

O t hers 0.0 0.0 0.0 0.0

Tot al Tax 13.0 18.7 24.3 32.1

PAT 29.8 45.9 60.3 82.5

G r owt h ( %) 15.0 54.0 31.3 36.8

EPS (|) 13.6 20.9 27.5 37.6

FD EPS (|) 13.6 20.9 27.5 37.6


Cash flow statement | Crore( Year- end M arch) FY14 FY15E FY16E FY17E

Pr ofit aft er Tax 29.8 45.9 60.3 82.5

Add: Depreciat ion 5.2 5.9 7.0 9.2

( Inc) /dec in Curr ent Assets - 8.1 -3.6 - 8.2 - 16.1

Inc/( dec) in CL and Provisions - 0.3 8.8 11.4 18.2

CF fr om operating act iv it ies 26.6 57.0 70.5 93.8

( Inc) /dec in Investments 0.0 0.0 0.0 0.0

( Inc) /dec in F ixed Assets - 10.4 -75.0 - 68.0 - 10.0

O t hers 0.6 1.6 2.3 1.1

CF fr om investing activities - 9.8 -73.4 - 65.7 - 8.9

Issue/ (B uy back) of Equity 0.0 0.0 0.0 0.0

Inc/( dec) in loan f unds 0.0 0.0 0.0 0.0

D ividend paid & dividend tax - 9.6 -19.2 - 12.8 - 23.1

O t hers - 0.3 -0.5 - 0.4 - 0.4

CF fr om financing activit ies - 10.0 -19.8 - 13.2 - 23.5

Net Cash f low 7.2 -35.6 - 8.0 61.9

Opening Cash 37.8 45.0 9.4 1.4Closing Cash 45.0 9.4 1.4 63.2


Balance sheet | Crore( Year- end M arch) FY14 FY15E FY16E FY17E

L iabil it ies

Equity Capital 11.2 11.2 11.2 11.2

Reserve and Surplus 83.3 110.0 157.5 216.9

Tot al Shar eholder s funds 94.5 121.2 168.7 228.1

Tot al D ebt 0.0 0.0 0.0 0.0

D ef erred Tax Liability 6.1 7.6 9.8 10.8

O t hers 2.3 2.1 0.2 0.3

Tot al Liabilities 100.8 129.1 178.9 239.5

Assets

G r oss Block 83.4 93.4 106.4 236.4

L ess: Acc D epr eciat ion 30.5 36.4 43.4 52.6

Net B lock 52.9 57.0 63.0 183.8

Capit al WIP 0.6 65.6 120.6 0.6

Tot al F ixed Assets 53.5 122.6 183.6 184.4

Invest ment s 1.2 1.2 1.2 1.2

Invent ory 23.3 26.0 31.0 41.9

D ebt ors 13.1 14.5 16.9 22.8

L oans and Advances 2.9 2.6 2.9 2.5

O t her current assets 0.6 0.3 0.8 0.6

Cash 45.0 9.4 1.4 63.2

Tot al Cur rent Asset s 84.8 52.8 53.0 131.0

Cr edit ors 27.1 33.4 41.0 54.7

Pr ovisions 7.8 9.6 11.8 14.7

O t her current l iabil ity 8.8 9.5 11.0 12.7

Tot al Cur rent Liabilities 43.7 52.5 63.9 82.1

Net Cur rent Asset s 41.2 0.3 - 10.9 48.9O t her non-curr ent asset s 5.0 5.0 5.0 5.0

Application of Funds 100.8 129.1 178.9 239.5


Key ratios

( Year- end M arch) FY14 FY15E FY16E FY17E

Per share data ( |)

EPS 13.6 20.9 27.5 37.6

Cash EPS 16.0 23.6 30.7 41.8

B V 43.1 55.2 76.9 104.0

D PS 7.5 7.5 5.0 9.0

Cash 20.5 4.3 0.6 28.8

Oper ating Ratios (%)

EB ITD A Margin 10.6 11.9 13.2 14.1

PB T / Net sales 10.0 12.2 13.0 13.8

PAT Margin 3.8 4.7 5.2 7.1

Invent ory days 19.7 17.0 16.0 16.0

D ebt or days 11.1 10.0 9.5 10.0

Cr edit or days 23.0 23.0 23.0 24.0

Return Ratios (%)

RoE 31.6 37.9 35.8 36.2

RoCE 42.5 47.0 46.8 47.4

RoIC 72.8 105.3 138.7 61.6

Valuat ion Rat ios (x)

P/ E 30.2 19.6 14.9 10.9

EV / EB ITDA 18.8 14.2 10.4 7.1

EV / Net Sales 2.0 1.7 1.4 1.0

M arket Cap / Sa les 2.1 1.7 1.4 1.1

Pr ice to B ook Value 9.5 7.4 5.3 3.9

Solvency Ratios

D ebt /Equity 0.0 0.0 0.0 0.0

Cur rent Rat io 1.9 1.0 0.8 1.6

Quick Ratio 1.4 0.5 0.3 1.1



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Sector / Company

RoE (%)EPS (|) P/E (x) EV/EBITDA (x) RoCE (%)



RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093

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ANALYST CERTIFICATION We /I, Nishant Vass MBA (FINANCE) Venil Shah MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures: ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and employees (ICICI Securities and affiliates) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances.

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ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. It is confirmed that Nishant Vass MBA (FINANCE) Venil Shah MBA research analysts and the authors of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business.

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20141120 Atul-Auto-Limited 27 QuarterUpdate

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