Atul Auto Limited

Stock Opportunities
401

Think of it this way Rudra :

A. How many people know Ramdeo Agarwal vs. Vijay Kedia (purely meaning who commands more glamour following and publicity)

B. By transferring 5% of his shares he has suddenly attracted more visibility/publicity for the stock

C. By transferring 5% of his shares he has attracted more value for every balance share which he holds.

Net Net he has created more value by transferring merely 5% of his holding. Isnt it a win win deal for him.

You need to unlock value someway–he is doing it the smart way.

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402

I agree with Ashwini’s assessment. The sale of shares to by Kedia and Chandra to Motilal Oswal & Sanjoy Bhattacharya seem to be a part of their strategy to improve institutional interest in the stock. I personally prefer managements that focus on the co performance rather than on promoting their stock. But as long as co’s performance does not falter I guess this is acceptable.

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Yes, agree with Ashwini. I think Mr. Kedia has done well by bringing in couple of big investors.

As he already had a sizable stake (about 18% of the co) from very low levels, this could be possibly the best way.

Regards,

Ayush

404

Vibgyor Vehicles Ltd. eyes North Eastern 3W market,especially Assam.

405

As part of the fundamental analysis, we all have been looking at return generated on capital/equity deployed in the business (ROE/ROCE) of a business in a particular year or may be 5/10 year average ROE/ROCE numbers. Even though, ROCE/ROE are important parameters, equally important is what returns are generated on incremental capital deployed in the business. So 5 years ago if a business deployed capital of Rs. 100 and generated 30 Rs of net profit resulting into ROCE of 30%. If after 5 years if the same business today deploys capital of Rs.150 and generate net profit of 37.5 resulting in ROCE of 25%. This effectively means that additional capital of Rs. 50 resulted yielded returns of (7.5/50) i.e. 15% only! This deterioration in returns may indicate weakning moat/pricing power or decreasing asset turnover and hence one need to dig deeper.

So I undertook an exercise to evaluate how effectively companies in my portfolio have deployed capital in last few years and Atul auto not only came out on top. For Atul, if we deduct cash and investments (As they are not capital deployed in the business), Atul increased its profit from 0.46 crore in 2009 to 26 crores in 2013 without deploying any additional capital deployed in the business. Fixed asset + working cap actually reduced from close to 60 crores in 2009 to less than 51crores in 2013. This is phenomenal by any standards. This effectively means that company has been generating close to infinite return on capital deployed consistently for last 5 years. This is combined effect of inherent asset light business model (for most of vehicle manufacturers) and phenomenal working capital management. It’s inventory turnover increased from 6.6 to 15.85 and debtor days reduced from 11 to paltry 7! The credit must go to Atul’s management for putting up this spectacular show.

Best Regards

Dhwanil Desai

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406

Different phases of learning:

Initially I learnt, asset turnover is important, it hints towards the asset heavy/light models. Then came the peak utilization and thus more capital infusion, which reduced the asset turnover. So I learnt asset turnover can’t be high always and it is more like a zig-zag (for me, it suddenly made asset turnover, little less sought after than before). Bringing up this thought to get seniors views to get clarity & improve my mental models on Asset turnover and use it more effectively.

Thanks,

Atul

407

Looks like the growth has slowed down quite a bit on this one. Ayush says he does not see a fair-PE above 15 for Atul, leaving a 25% re-rating upside. I am not sure how wise it is to sit and wait for re-rating to occur since profit growth has slowed down a lot, and it is unclear when it might revive. Is it time to book profits and move capital to other companies showing screeching fundamental growth like Alembic and Shilpa? Love to get advice from senior valuepickrs.

408

I think still it can grow at 25%…its good long term bet…lot of potential for growth due to branch expansion and some untaping areas like sri lanka and african nations…and its upcoming LCV portfolio…etc…

as management told that they r targeting a turnover of 1000 cr by FY16…

FY13 turnover is 410 cr…

I am expecting stock will be appreciated by 300% in coming 3 years…

409

Yes, Dhwanil, this has been one of the most interesting co for me…having been invested in it for last 2-3 years…used to notice the superb improvement in the quality of earnings and everytime used to be exited and used to feel that re-rating should happen…finally the re-rating has been happening and it gives a great level of satisfaction and learning. The stock has rewarded superbly.

The most interesting part of balance sheet was the inventory which was maintained at just 20-25 odd Cr and receivables at just 5-7 odd Cr despite growth in sales from 80 Cr in 2008 to 365 Cr in 2013.

Plus the co has been improving the transparency levels and dividend payouts.

Regards,

Ayush

410

The company clearly has good management and can continue to do well given the small base but once it reaches a slightly bigger size it could start facing technological hurdles. Right now they are eating the low hanging fruits.

Bajaj auto will soon launch its RE 60 - a 4 wheeler positioned to replace auto rickshaws and good carrier, that can cause disruptions in this space.

411

Also, entry of noted value investors Sanjoy Bhattacharya and Ramdeo Agarwal provide additional sizzle to the story. Typically both these investors are known to invest for long haul in a business that is scalable. So let’s see how the story pans out moving forward.

Yes, Dhwanil, this has been one of the most interesting co for me…having been invested in it for last 2-3 years…used to notice the superb improvement in the quality of earnings and everytime used to be exited and used to feel that re-rating should happen…finally the re-rating has been happening and it gives a great level of satisfaction and learning. The stock has rewarded superbly.

The most interesting part of balance sheet was the inventory which was maintained at just 20-25 odd Cr and receivables at just 5-7 odd Cr despite growth in sales from 80 Cr in 2008 to 365 Cr in 2013.

Plus the co has been improving the transparency levels and dividend payouts.

Regards,

Ayush

Best Regards

Dhwanil Desai

412

Good points, Dhwanil & Ayush.

To cut the long story short, market loves High Growth, Good Growth, Consistent Growth.

High means 20% or more, Good means at high ROCEs, consistent is self-explanatory.

Now if that happens with increasing ROCEs (like Atul or Ajanta), that’s amazing. But even with non-increasing ROCEs (like Mayur, PI, Gruh etc), stocks will be multi-baggers.

Basically its all aboutHigh Growth, Good Growth, Consistent Growth.

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Regarding Atul, problem is that auto industry is cyclical. So, as Atul gets bigger it may face difficultly in showing that High growth, Consistent growth.

November wasn’t great for Atul. So, what will you guys do if Dec also proves to a low growth month?? Will you hold/add??

If yes, then how many BAD months will you give to Atul before taking a hard look at it? 3-4 months or even more?

Would request Dhwanil, Ayush & others to share your thoughts on this issue…

PS- I believe Atul can go to 20PE as it grows bigger IF it shows high growth consistently. I am holding as of now but not happy with Nov numbers.

I know, Bajaj Auto’s 3-wheeler segment de-grow 30% in November.

(http://moneylife.in/article/auto-sales-in-november-weaker-than-expected-across-segments/35532.html)

413

Hi Jatin

As you very rightly put it market, sooner or later, gives due respect to rate of growth , quality of growth and consistency of growth. Market loves predictability and willing to pay premium and hates uncertainty and discounts it heavily.

Coming back to views on Atul, factor that is working in favour of Atul is the relatively small base. It is much easier to grow at decent pace or above industry average while you are growing from small base. So, it is plausible that Atul can grow at 20% for few years while increasing its market share from 7% to 10 to 12%. However, for Piaggio, which holds 56% market share, it is extremely difficult to grow at rate higher than industry, especially in shrinking industry.

Coming to monthly numbers, I personally would not make investment decision based on monthly sales numbers. What matters to me as an investor is whether company, on annual basis, is growing at decent pace or not. I think, YTD company’s vehicle sales has achieved 17-18% growth. Some part of growth may also come from price increase in line with inflation. So 22-25% growth in topline is possible. If company maintains the margin (it will be very difficult for Atul to increase margins as they have seem to have squeezed in lot of operational efficiency gains!), similar growth in bottom line is possible.

Now, talking about years ahead, management is planning to set up a new plant which will double the capacity. This indicates that for next few years, management is reasonably optimistic about growth.

Having said all this, I also feel that there has been decent re-rating of AAL in last few months and hence further re-rating will happen only if there is 20%+ growth on consistent basis. However, while in momentum, market can surprise you on both sides. So, I personally will maintain “hold” and wait to see how things unfold over next 6-9 months.

** High Growth. ** ** aboutHigh Growth. ** ** what

** hold/add??If **

more? ** http://moneylife.in/article/auto-sales-in-november-weaker-than-expected-across-segments/35532.html Link: http://moneylife.in/article/auto-sales-in-november-weaker-than-expected-across-segments/35532.html )

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414

** what hold/add??

In the last conf. callmgmt. said, vehicle sales are normally slow in last 2 month’s of the year.So poor sales in Nov-Dec is somewhat in the expected range.

Also there is spike in auto loans in last two months of FY (Feb-Mar) to avail benefits of depreciation. Hence Feb-Mar could be additionally beneficial for auto companies.

**

415

Hi Rudra,

I talked about low growth relative to Nov-12 & not low on absolute level.

callmgmt.

416

I was in Bhubneshwar earlier this week for a couple of days. I was pleasantly surprised to see the number of Atul autos on the roads. It clearly came in second after Piaggio in terms of numbers seen on the streets. A good example of how this company is establishing a foot hold in various parts of the country.

This company has a long way to go and given its efficient operations, is a keeper.

417

Hi Jatin,

Volatility in monthly nos is pretty normal…just in the month of Oct, when the co did 23% growth on a high base, it felt that high growth rates are back and now when in the month of Nov the growth rate is down to 7%, we are getting jittery. Perhaps the right way to look is year to date growth and which is respectable at 17-18% in an environment where the industry is posting negative growth.

Yes, if the growth slows down to less than 10% for sometime, then it won’t be good for the stock.

Regards,

Ayush

418

Buffeette preached above in his AR, I guess above parameter is a good indicator but more useful for a stable and old company. ATUL is a growth company so one should decide more based on following:

  1. Size of opportunity

  2. Growth plans - key question here is how much capital needed?

  3. Competitive landscape - How strong is brand? Can a newcomer disrupt it? ATUL is weak here is a strong newcomer comes up.

I do not mean to tilt your opinion but couldnt resist posting above. As always views welcome.

419

Atul Auto sales figures up 23.1%…They have sold 3510 units in December 2013 compared with 2844 units in December 2012…Superb performance…

420

Atul Auto sales figures up 23.1%…They have sold 3510 units in December 2013 compared with 2844 units in December 2012…Superb performance…