Atul Auto Limited

Details from the conf call:

Atul’s Finance & Marketing Head attended the call. I have tried to segregate the call details into Risks, Opportunity and Fact segments as per my understanding, please correct me, if anything is wrong.

Risks

)- Keen interest to get into 4 wheeler’s, but plan still not finalized. Technical evaluation continues, opento tie up with other’s.

)- Greaves Cotton Relation- 35 years of working together. earlier the agreement’s were for 3 years at atime, now it’s for 7 years. No intention to enter into engine manufacturing. Regular price revisiononce a year to take into consideration the price increase for engines.

)- Capex plan - Still evaluating, need to put up another plant, In the next 12-24 month, they will need100 cr capex for new plant, for a capacity addition of 50k vehicles per annum on a single shift basis. To be funded by low Debt and internal accrual. Treasury is above 40 cr.

Facts

)- Expansion completed, current capacity is 48k vehicles per annum

)- Dealership network spread across 16 states of India, 144 dealership

)- Very good growth rate expected for next quarter too.

)- Domestic Market industry growth in Q3 - 11%

)- 50-50 breakup between passenger and cargo segment.

)- Factor’s driving growth -

)- Geographical expansion in addition to industry growth.

)- Major Markets

)- Western India - 60%

)- Southern - 22-25%

)- Eastern - 10-15% , just started entering this market.

)- Dealership Network - Now - 144, 12 month’s back - 104

)- 3 reasons for higher margins for Market Leader Bajaj - Economies of scale, almost depreciated plantand own engine.

)- Market share - they are into .5 ton segment - market share Atul - 10.5% , M&M - 22% , Piaggio - 62% ,scooter india ? - 5%

(Bajaj is in .35 ton category and hence they didn’t consider Bajaj as competitor. Also Piaggio & TVS are the other main players in this permit dependent market)

Opportunity

)- Working on the product’s for alternate Fuel - LPG and CNG products will come out in 2014. Recentlytied up with TVS for LPG engine (first time in Indian industry). They didn’t wait for Greaves tocomplete the engine R&D , as they had an urgency to come up with LNG-CNG vehicles.

)- Plan to enter Sri Lanka - Ministry of Industry cleared the proposal, next is ministry of environment,to be cleared in next 10-15 days. Land identified, plan to put a compact plant. 15-20 crore capex. It willbe a manufacturing plant. They will be sending half cooked stuff from India, and have to meet the valueaddition criteria of Sri Lanka. Capacity - 12k value per annum. Sri Lanka Market size is 10k per monthand Bajaj is the market leader in Sri Lanka.

The Sri-Lanka operation will have better realization than Indian market.

Reason for plant in Sri-Lanka - increase in import duty, the market not big enough for big boys Bajaj & Piaggio to put plantthere.

Question on my mind - Will this be a game changer??

)- Outlook for EBITDA Margin - hope to sustain at these levels of 12%

)- Atul plans to enter the 0.35 ton segment this year with a product this year.

Am surely gaining more confidence now after getting updates on the plans for alternate fuel models, Sri Lanka plan, and 0.35 ton models and will be keen to add more in next few days.

just went through the concall. well summarised by raj. i have a few points to add:

1). current vehicle volumes is about 34000 per annum. as the company moves towards full capacity utilization of 48000, net margins are expected to improve by 150-300bps

2.average realisation in srilankan market is expected to be better than in the indian market.

3). domestic market is expected to stabilise in Q4 and improve from there on.

4). 0.35 tonne segment is growing at a much faster rate than 0.5 tonne segment where atul operates. atul’s entry to 0.5 tonne segment should bode well for growth. company expects to enter that in fy14.

i got a reasonably positive feel from the management plans and outlook. atul is a buy on dips for me.

Raj,

Can you also check with the Bajaj/Atul dealers.

1). Bajaj must be sourcing the 0.5 T Diesel Engine from Greaves only? in which case they do not have much of an edge except the established brand. margins offered (to dealers) may not be any higher.

2). Comparative average monthly Sales for 0.5 T Baja and Atul Autos

Thanks

Donald

Re: Concall

I would have liked answers on two of the most important things in current scenario.

a) Questioning the slowdown in Sales in recent months; reasons & visibility for next few quarters. Do they view the industry slowdown as a RISK that is already/will impact them sooner than later? Can they grow faster and buck the overall 3-wheeler trends, why??

b) Questioning the (happy)Advance situation; Advances grown to 40 Cr, is that sustainable, why? They had said earlier this was a result of the waiting period for Atul Autos. With Increasing in production but reduction in overall demand - why will this continue?

basically the current great low/neg working capital situation - can we take it for granted this will stay for the full year and more.

In a growth returning to normalcy situation (not NOW), this advance situation and the doubling of capacity to 48K at very little incremental capex are great drivers of future profitability.

Raj & Hemant and anybody else who attended - fo you have any clues on the above?

In my mind I completely discount future growth drivers spoken about- such as Sri lanka growth prospects, entry into 0.35 segment, LPG segment entry, etc. Incremental additions to overall Sales/Profitability can only be marginal. Besides they are some distance away, they are probably 9m-1 year away from fruition, it looks to me. I want to know with some clarity what will next 3 months look like, then FY14, and not interested in FY15:)right now,given the visible slowdown. Many thangs can happen/have to happen in between.

Ayush - Your turn to focus on a few important things in your update with Management, since Concalls have given most of the details.

-Donald

donald,

according to my understanding from the concall, on visibility for growth and reasons for optimism - mgmt was questioned on it and they said that the industry is growing through tough times but they have been growing by gaining market share from the exisiting players. they said, their presence on pan-india basis except western india is fairly limited and by expanding their reach to new states, they have been able to sustain their growth momentum because rates of growth in new regions is much higher than the exisiting ones. they expected to maintain the growth rate of 9m fy13 to the last quarter as well. they also hinted at demand situation slowly bottoming out.

Today S. P. Tulsian, on CNBC TV says Atul Auto can touch Rs.260 in 6 months. I prefer the analysis done at Valuepickr than to those given on TV. But investors have a herd mentality. Will not be surprised if the stock moves up today.

Hi,

Had a discussion to get some of the answers to above queries:

1). The Oct-Nov was the best period due to Diwali & navratra. Historically these are the best months for the co. So as per them, its normal for monthly volumes to drop a bit after those months.

2). The co is confident on being able to maintain the current growth rates.

3). The growth has been good given the industry scenario. Industry has been growing at about just 5% vs expectation of 7-8%. Hence the co is doing well.

4). The capex to double the capacity to 48000 vehicles has been completed at a very little incremental cost of just 11-12 Cr and as these will start getting utilized, better efficiencies may come in

5). The cash on BS is more due to operations. Not much of advance from dealers (though they have a cash and carry policy where dealers are paying in advance). The co is not doing any capex just now and hence the cash is accumulating.

6). Going forward, the co is trying to expand the product basket and this might be a key growth driver. They are coming up with smaller 3 wheeler diesel engine, petrol & lpg product etc. Hence a complete product range would be available.

Rest of the points have been well covered above.

Thanks,

Ayush

Reliance securities in its report on 5th Feb says

"Despite the slowdown in three-wheeler space, AALâs 3QFY2013 results were above

our estimates. The company has reported strong sales numbers for April 2012-January

2013 (up ~20% yoy to 26,400 units). Three-wheeler industry is anticipated to grow by

3-4% during FY2013E; however, the management is confident of clocking more than

20% volume growth in FY2013E. We introduce our FY2015E estimates with this

update and expect ~22% CAGR in Net Sales over FY2012-15E to Rs546cr aided by

capacity expansion at Rajkot plant, setting-up of an assembly plant in Sri Lanka,

increasing dealership network and focus on exports. We expect Net Profit CAGR of

~24% over the same period. At the CMP of Rs214, the stock is trading at a P/E of 8.9x

and 8.0x its FY2014E and FY2015E EPS respectively. Hence, we recommend a Buy

on AAL with a Target Price of Rs269"

First time I saw an.add in the Malayalam leading daily highlighting 24 months warranty, better mileage, powerful battery with better dynamo and hence better lighting and an easyinstallment schedule manageable for most owners!

For all fellow valuepickrs- I’ve been following this chain for sometime but haven’t put any money since I haven’t actually “seen” any Atul on road (being based out of Bangalore). Got a chance to visit Assam(Guwahati) recently and was surprised to see quite a lot of Atul there (both passenger as well as cargo). Just by observing, 1 out of 10,12 vehicles seems Atul. This is interesting since I didn’t know about them expanding to NE. May be an additional data point for others so posting it

Ayush,

Thanks a lot for the crisp update.

I don’t have any concerns now other than tracking Feb/Mar Sales. If there is an uptick in Feb and Mar sustained, might be adding more.

Btw, did you ask any timeframes for new growth drivers kicking in. How far is Sri Lanka from adding anything significant?

-Donald

Hi Donald,

The key thing is that the co is in a sweet spot with the capacity expansion at very minimal cost. So if they are able to scale up quickly, the margins can improve. However, I think the demand slowdown is certainly there and we need to monitor monthly sales nos.

The Sri Lanka thing will take atleast an year to show up any material nos etc. I think its better that they don’t undertake any major CAPEX and let the cash flow keep kicking in.

Ayush

Ayush,

Agree with you. While we should carefully, company is in a sweet spot. About the accumulating CASH, I mean. I did not qualify this before, but hey Cash piling up from Operations is too good a thing!

But there is a disconnect. How do you have negative working capital, if you do not have big chunk of Advances; I do not think they have that kind of bargaining power with suppliers to extend payables for too long.

And what is Cash from Ops? if I think about it is CASH getting tied in Inventory. Inventory is then sold to Dealers. and becomes Sundry Debtors. When collected back from the Dealers, turns back into cash. So CASH----->Inventory----->Sundry Debtors------->Cash.

So you have faster Inventory Turn and Debtors for Ops yes, but you need to have much lower Payables turns or longer Payables cycles to have a negative working capital situation. which is what we are seeing, right?

This can only happen if you have a big chunk of advances shoring up. Or, am I missing something?

Can you please help decipher?

-Donald

Hi Donald,

Since start the most noticeable thing about the company has been the excellent working capital management. Had highlighted the same during this blog post -http://dalal-street.in/atul-auto-ltd/

Will have to update the same to get the current view.

But the working capital is now becoming negative as the inventory has been maintained at just 20-25 odd Cr, despite the turnover rising almost 3 times over last 4 years. Similarly debtors is almost NIL at less than 5 Cr.

While they are getting the standard 30 or 45 days credit from vendors (different days for different vendors) and hence the working capital had been going down over the years and is now negative.

Ayush

Ayush,

Okay Inventory being at 20-25 Cr is one reason.

Debtors being almost NIL - in a increasing Sales situation how does that situation arise - I can only think of Advances from Dealers putting them into that happy situation.

Payable terms remaining same - with increasing Sales/supplies from vendors one would have a larger Payables bill, with smaller Inventory, and negligible debtors - so thats causing negative working capital situation, right>

But you have negligible debtors situation - only because you have sizeable advances, not otherwise. So I am not able to understand the argument from Management - this is from Ops not Advances.

Let me call you to get a hang!

-Donald

**ATUL is all set to double its production capacity from 26,000 units per annum to 48,000 units by April
**

Mr Vijay Kedia’s interview

breif-

looking to raise market share to 6% from thepresent5%

2013-2014 keen on maintaining growth at 20%

my experiences with technical level on medium term basis

trading zone rs. 175 to 195. on closing basis.

no trading zone rs. 195 to 205 on closing basis.

trading zone from rs 205 to 225 on closing basis.

How do you implement it?

Buy between 175-195 and sell between 205-225?

no

sell below 195 and buy at 175-176

buy at 205 sell at 225

if you see today’s high and low,you will appreciate the levels i have given yesterday

low is 175 and high is 195.

My layman check in Konkan region shows increased spotting of Atul autos on Bbay-Goa highway. (This is not a proper channel/dealer-check like experienced investors do). I’m extrapolating decent sales for Feb month too and due to overall weakness in midcap space Atul is giving a good chance to add at 180 levels today.Everytime I look at it, I can’t believe co. with consistent growth is still available at PE ~9.5. Let’s see what sales numbers they publish on Friday.