My note on the company, feel free to add or provide counter views if I have missed anything.
Summary: Focused, Niche, Adaptive, Debt Free, Owner Operated, Ethical, Clean Financials, 25%+ ROE and ROCE, Excellent Capital Allocation, Reasonable Valuation, Upcoming Capex
Business Model:
>> Atul Auto is a 3W manufacturer of auto rickshaws, pick-up vans and chassis of passenger vehicles based in Gujarat. It offers range of diesel, gasoline, CNG, LPG and electrical vehicles in passenger and cargo segments. The company was started in 1986
>> Product Portfolio consists of wide range of models; they procure engines from Greaves Cotton, majorly batteries from Exide and tyres from MRF as well as CEAT. It has demonstrated building of customized model to suit local requirement which is difficult to do for bigger players
Competitive advantages:
Excellent Dealer Network in focused markets
Company has been able to establish 300+ dealers across India and has overseas presence as well; currently it has 15+ regional offices and 2 training centers; its dealership, sales, service, and spare parts network comprises over 600 touch points across the globe
Relatively low cost player and hence able to gain market share from big players:
>> Market share: Cargo - 17%; Passenger - 4%; Overall - 6% (Competitors: Bajaj - ~58%; M&M - ~9%; Piaggio - ~24%); Atul Auto has been able to eat into market share in niche markets due to strong focus, customer service, knowledge of markets and distribution relationships
>> Despite Atul is competing with giant players, it has been able to maintain its operating cost thanks to cheap local labour and lesser transportation costs to local markets; It enjoys ~10-12% operating margins and ~7-10% Net profit margin
Focus in 3W and deep understanding of markets:
>> It is much focused player on 3W and has been able to increase its turnover. It is currently No. 1 player in Gujarat with ~35-40% sales contribution
Owner operated company:
>> Jayanti Bhai Chandra and his son Niraj Chandra are at the forefront of the managing the company; Mr. Jayanti Bhai is gem of person - humble, frugal, conservative and does lot of charity in local community; He has been awarded as "Gujarat Ratna" twice in recent years by CM of Gujarat; Niraj on the other end is technocrat and has deep understanding of the industry
Interesting points about the company:
>> Capacity Utilization: It has current capacity of producing 60,000 vehicles/year and operating at ~70% capacity utilization levels
>> Exports: It supplies vehicles to 12+ export markets; Primary focus in African and Latin American markets. They have been receiving repeat orders from most of these markets
>> Steady Compounder: Company has been able to compound at 42% profit CAGR in last 10 years with 25%+ ROE and 30%+ ROCE. Growth had been challenge in last few years though
>> Capital Allocation: Has been debt free since last 5+ years and has been able to do incremental capex from internal accruals
>> Clean financial statements: It has clean balance sheet with zero debt; Generates healthy cash flows; Pays 30%+ in tax; Profits are getting converted broadly to operating cash flows; Pays dividends
>> Small but Agile: Company has historically demonstrated good adoption to new technology and has comfortably transitioned to BIS regulations, gasoline, LPG, CNG and now with electrical vehicles despite being very small company
>> Credible Shareholding: 52.7% with promoters; Aditya Birla, HDFC, Ashmore, Sundaram MFs with ~17%; Vijay Kedia with ~1% (Director in company); Retail ~15-20%
Key triggers:
>> New Capex in Ahmedabad: Atul Auto is in process to set-up new plant in Ahmedabad which will produce 60,000 units/annum at a cost of ~150 crores (mainly funded by internal accruals). This will double their capacity (current capacity of 60,000 units/annum). This is expected to commence in FY20 and utilization levels will take 1-2 years
>> As scale will increase, the operating leverage will kick-in and their bargaining power with suppliers and distributors will rise further
>> Electrical Vehicles: It announced the incorporation of its wholly-owned subsidiary, Atul Green Auto Pvt Ltd., with an objective of exploring opportunities in providing e-mobility and generating clean sources of energy, requiring minor additional capex
>> With emergence of Electrical Vehicles, it will give level playing field to Atul Auto to some extent and that can enable them to gain more market share in the space
Risks:
>> Geographical concentration of customers
>> Cyclicity of CV vehicles segment
>> Exposure to raw material price volatility
>> High competitive intensity; Dumping from China
>> Any damage to plants or delay in plant capacity utilization can adversely impact the company
>> Overall market-wide de-rating of mid and small caps can affect returns in short term
Disclosure: Have small tracking position
that they continue with the momentum theyâve picked up since the last financial year for some more years to come.
