I-direct Instinct - Atul Auto (Buy): Capital efficient player at inexpensive valuations

Atul Auto (AAL), in over three decades of existence, is a prominent 3-W OEM based out of Gujarat with a presence across passenger, cargo segments (60%, 40% as of FY20, respectively). Domestically, it commands ~6% overall market share (4% in passenger, 16% in cargo). It offers 3-Ws across the fuel range viz. diesel (~80% of sales) and alternative fuels (petrol, CNG, LPG; ~20% of sales) including e-rickshaws; with in-house lithium ion offering slated to be introduced in the next two to three quarters.

Triggers

Sound financials merit mean reversal in valuations

Over the years AAL has shown strong financial prudence (net debt free since FY12), including during years of rapid volume growth (FY12-16 volume CAGR at 13%). The company has been CFO positive in each of the past 10 years and been FCF positive in seven of the last 10 years. Return ratio profile has remained impressive (> 20% RoE, ~40-60% RoIC till FY19) despite slowing growth in volumes, revenues, profitability post FY16. Notwithstanding fall in volumes, however, AAL continued to command healthy mid/high teen P/E multiples till FY20. At CMP, AAL trades at ~7.4x FY20 earnings i.e. near bottom of valuation cycle. We believe there is room for valuation catch up in AAL in view of continued strong B/S and financial performance, which remain superior to several sector peers.

Capex largely over, volume outlook reasonably positive

AAL would soon be commissioning a greenfield plant at Ahmedabad (60,000 capacity per annum). With FY21E to be a near washout due to Covid-19 (~40-50% volume decline), healthy recovery in sales volume is expected from FY22E onwards with AAL aiming for ~ 1 lakh unit sales in the next four to five years. Interventions like scrappage policy & GST cut could certainly hasten recovery prospects, with AAL being a key beneficiary.

Valuation & Outlook

We value AAL at Rs. 215 i.e. 9x P/E on FY20 EPS of Rs. 24 and assign BUY rating. Although the 3-W segment is one of the hardest hit due to social distancing norms amid Covid-19, it is also difficult to catch the bottom of the cycle. Hence, at the CMP, AAL provides an attractive risk-reward opportunity with inexpensive valuations, healthy balance sheet and sound capital efficiency. Slower than expected ramp up in future offtake remains a risk to our call.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirectInstinct_AtulAuto_Sep20.pdf

Shares of ATUL AUTO LTD. was last trading in BSE at Rs.172.3 as compared to the previous close of Rs. 177.05. The total number of shares traded during the day was 9268 in over 617 trades.

The stock hit an intraday high of Rs. 175 and intraday low of 167.9. The net turnover during the day was Rs. 1590685.

Source : Equity Bulls

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