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 don’t 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 couldn’t 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 company’s dealer network remained static. This is inexcusable for a growing company in a business which is so heavily dependent on distribution channel. You can’t 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 company’s product portfolio. This was a company which had moved up the value chain from “Chakdas” 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 don’t 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 company’s 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.