Does anyone has the transcript of the investor call that happened on 10th August?
Very useful, thank you very much.
Iâm unable to download the transcript from researchbytes. Is there any problem?
http://ftp.motilaloswal.com/emailer/Marketdiary/Result/AtulAuto110816.pdf
Motilal oswal has come up with a report.
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Ramodev Agarwal exited Atul Auto as per Annual Report FY16 data
There seems to be significant deterioration as observed from the Annual report and Corporate ppt. Receivables and inventories have gone up, leading to increased working capital requirements. Even though the PAT has gone up, the CFO has more than halved. Quite possible that the company is pushing the dealerships to keep more inventory and recognizing them as sales/profits but its not leading to actual cash generation. The advances from customers have also reduced.
Any observations or different point of view from members?
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Sharp jump in receivables indicates company booked sales in March on credit (consignment sales) instead of April as a workaround for VAT issue in Gujarat. Thatâs one reason sales has dropped in Q1 and cashflow is poor for FY16. We will have to wait for Q2 balance sheet to see if receivables position has improved. Otherwise this company is going downhill.
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FY 16 AR offers a glimpse of actual actions of stock brokers turned super investors/ TV talking heads/market gurus:
Kedia- sold out his entire 253k stake during the fierce market sell down in Jan/Feb 2016, before panicking ( my guess) and selling out , he actually added 150k shares when the market was bullish in Dec 2015, so his actions were no different from those of any novice investor- buy when the stock is rallying and sell when the market is tanking.
Raamdeo- his fingers were even more nimble, he sold out his entire 180k shares during the market sell down in end May and June 2015. His timing was pretty good though ( this is something many brokers are genuinely good at), he avoided the worst of the falls just a few weeks later.
So much for these âgurusâ and similar talking heads who claim to buy during sell downs and sell at peaks or never sell at all ( after all, we are long term investors!).
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Is it true that Atul Auto is launching e-rickshaw in January 17 ? There is no official announcement from the company and this news has not appeared anywhere else either
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I think yes⌠We attended AGM this year and Mr. Adhiya said they will launch at the beginning of next year.
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Ok, Thanks for the information!
I think Atul Auto is back as it has posted strong monthly sales number from last couple of months. As economy improves,
it should do well and re-rating is possible
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While revival in monthly sales is positive, the current pricing also appears to discount expectation of revival in my opinion. The future growth in price would be more driven by new plant commencement,increasing market share in Non-Gujarat market and probably launch of battery driven 3Wheelers.
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Increasing market share in Non-Gujarat market would be the Catalyst and big opportunity for Atul Auto. I think current pricing partly discounted the expectation of revival. Stock has moved up from 400 to around 500 levels in last couple of months. With Rural economy improving , it augurs well for Atul but i also feel thats it needs to foray into 4 wheeler sector that is where from, more profits will come even though competition is severe.
I have been holding Atul Auto in my portfolio for last couple of years. The company reported great performance which was reflected in its upward movement on the stock market. However, I recently looked at the company, and what I find here worried me. Let me tell you why:
I see a lot of Red Flags:
Cash Flow from Operations is lagging way behind PAT for last 3 years. That is the starting point. Cash received from customers does not add up (large write offs? - up to 68Cr in last 5 years which is 3% of 5 years cumulative sales )âSloan Accrual Ratioâ is flashing Red in last 2
years. When looked in combination to the above, looks fishy
Now the real big ones:
A/C receivables have jumped 83%, 146% and 137% YoY against YoY sales growth of 18%, 16% and 7% respectively in last 3 years
A/c Receivables as a % of Sales used to be around 2-3%, but now has jumped to 6% last year
and 14% in FYE16.
In the current receivables, entities in which Directors have a holding owe more than 6.5 Cr - almost 10% of total outstanding and around 58 Cr of Sales is to such related companies? Is
this a case of channel stuffing or are they trying to get creative and show growth to play the market?
Finished Goods Inventory has gone up by 81% in most recent period against a sales growth of 7%
Annual Report does not even mention these observations forget explaining them. Ideally I would have expected an explanation over these obvious concerns.
If they already have flat sales, the possible growth could come from Exports - but you would export 3 wheeler to poorer countries - Bangladesh, Africa etc. They currently have 1% share
of overall exports to these countries - as it is a very crowded, competitive market & they donât tell me how they are going to beat the incumbents. Bajaj, TVS are existing large players with much bigger reach, better brand and probably pricing power. Atul has lost market share in both Cargo and Passenger segment in the first 2 quarters of this FY. Sign of things to come?
The company does not talk about its USP and how it will compete against the elephants and also push more exports where as these giants are also trying the same.
The board does not seem to have qualified/experienced set of directors who can guide in terms of pushing more exports to these geographies.
All in all, this is what worries me:
Their positioning in the market and lack of clarity on where will growth come from?
No clarity on how they intend to take on incumbent giants, their own USP why do customers buy from them.
Significant degradation of financials although they still are a debt free company - which still is a big plus
Lot of parameters tell me that their sales are fishy, stagnant and the company is most probably trying to hide the true picture.
Looks ordinary in terms of board strength
So, I think itâs time to Sell Atul Auto. Look forward to the group thoughts,
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Very pertinent observations.
They seem to be going through tough times to generate growth.
To sell or hold is a very personal decision.
Personally I have sold my position earlier and may enter if the p/e comes down due to better performance rather than due to fall in price.
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Atul Auto was a top holding for me at one time but I exited my position completely sometime between Q1 & Q2 results this year. The accounting red flags were apparent right when the Annual Report was published. I recollect the following points which went into my thought process when I decided to exit:
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Besides the points mentioned by @srinath above, I had noted down some more. Company is delaying payments to suppliers, and paying interest thereon as a result. Amount o/s as on 31/3/16 is Rs.12.90 crores and interest Rs.2.61 lacs (Vs. 9.22 crores and Rs.1.22 lacs in FY15 end). Company has incurred interest expenses under various heads such as interest on MSME suppliers, income tax, etc. I donât expect this from debt free company. Cash equivalent of Rs.12.82 crores includes Cheques in hand of Rs.2.75 crores Vs. zero last year. Cheques in hand sometimes represent accommodation arrangements. Contingent Liability on VAT payable during inter-state sale of goods increased to Rs.13.58 crore (Vs. Rs.8.20 crore previous year). I have not seen such a Contingent Liability in any other Balance Sheet. There are some more items which I couldnât understand. All these items are individually not large but collectively not irrelevant either. More importantly, they are all trending in the wrong direction. They make me uncomfortable when viewed in the larger context of rising debtors and deteriorating cash flows.
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The companyâs dealer network remained static. This is inexcusable for a growing company in a business which is so heavily dependent on distribution channel. You canât blame poor monsoons for this.
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With export markets dead, it is safe to assume that existing players will divert capacity to the domestic markets to make up. And in this, Atul Auto is pitted against stronger players such as TVS, Bajaj, Piaggio etc. with a product (three-wheeler) which is essentially a commodity. If the overall market is not growing, this is a difficult situation to be in for smaller players.
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Battery operated rickshaws (e-rickshaws) are spreading faster than most people realize. Several players have entered the market but the analyst community is sleeping over it. I think e-rickshaw sales are not getting captured in SIAM data since many of manufacturers are small scale units from the unorganized sector. This renders all data about market share meaningless. Also, most of the analysts are Mumbai based where e-rickshaws are not present. I was in Jaipur earlier this year and found the city flooded with e-rickshaws. I took many rides, spoke to a number of e-rickshaw-wallahs and found the economics of business quite favorable.
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So I was not surprised that Atul Auto announced an entry into e-rickshaws this year, there is no other option. But this is a step backward; it further commoditizes the companyâs product portfolio. This was a company which had moved up the value chain from âChakdasâ to auto rickshaws. It also raises a question mark over the year or two wasted over the gasoline model developed for the export market. I donât know if this is poor strategy or sheer bad luck, but the time & money spent on the gasoline model is a real loss nevertheless.
To summarize, Atul Auto is stuck in a commodity business pitted against stronger players. I think the company will struggle to grow outside of Gujarat, where it does not have the benefit of a strong brand recall. I could find no moat, and I lost faith in the companyâs monthly sales disclosures.
Disclosure: No exposure at present. This is not a recommendation to buy or sell but only an articulation of my thoughts at the time of selling. My views can be wrong, or can change in future. The company does have its share of positives which I have not mentioned here.
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Interesting Observations, very well summarized
Look at 2013-14, 2014-15 and 2015-16 financial data. Looks like aggressive revenue recognition and possibly channel stuffing for last 2 -3 years. Accruals are high and earning quality low. And the business momentum is also going down. I got this red alert when Beneish M score flagged this as Red for last three years. Last two year data looks especially doubtful. Accruals were also very high and rising for last 3 years. Quality of earning is very bad for last 2 years and is not sustainable in my opinion.
In the first half of this fiscal I saw that accruals have somewhat gone down. I calculated this using BS data as Cashflow data is not available for quarter. For apple to apple comparison I did compute last year accruals using same BS method. Accruals have gone down this year in H1. but they need to do more to clean up the past excesses.
This reduction in accruals is positive if they maintain that momentum in H2 also. Will be interesting to see what kind of numbers they report for Q3 and Q4 and what shenanigans management resorts to because the sales are down by large percentage in Nov and Dec after DeMo. My guess is since business is bad and no one is expecting good results after DeMo they may take this opportunity to clean up the books and numbers inflated by them, by this year end.
This stock was part of my core PF and I must admit I did not do regular maintenance due diligence on this stock assuming high quality company and management. . Although this negligence cost me some profit in last couple of years overall I came out OK from where I had started.
Discl- Exited some time ago after holding many yearsâŚdue to concerns regarding deteriorating quality of reporting and earnings. Please do your own analysis and take a call. Do not depend on my analysis.
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