Atul Auto

Background

Incorporated in 1986, Atul Auto is a leading manufacturer of 3-wheeler commercial vehicles based out of Gujarat. Passenger auto rickshaws (3-6 seaters), pick-up vans and delivery vans (diesel, cng and lpg) are manufactured in a large number of variants.

Atul Auto’s Manufacturing plant situated at Shapar, 18 Kms. away from Rajkot has a production capacity of 24000 vehicle per annum on single shift basis. It is equipped with CNC machines, fabrication shop, high quality paint shop and test house. Atul auto’s R&D center is based in Pune.

Atul Auto has wind turbine generators of 1.25 MW capacity at Village Soda, near Jaisalmer, Rajasthan and another of 0.6 MW at Village Gandhavi, Jamnagar Gujarat.


Main Products/Segments

The Rear-Engine 3-wheeler Atul Gem is its fastest growing platform comprising ~57% of Sales in FY11. The front-engine 3-wheeler Atul Shakti is the other main platform bringing up ~42% of Sales in FY11. Atul Smart is a new brand of front-engine 3-wheeler launched in FY11.


Main Markets/Customers

Autorickshaw operators, transport operators and Corporates


Bullish Viewpoints

  • Growing 3-wheeler segment – This is a segment that has many growth drivers going for it. The government’s focus on road infrastructure development, restriction of heavy vehicles in the city, and the growing rural economy are important growth triggers. Over the years, Atul Auto has developed itself as a one-stop source for all 3-wheeler needs. It has made it’s versatile platform highly customizable to suit almost every kind of need and budget.
  • Impressive Growth -In FY11 Atul Auto registered a 68% growth in Sales and over 107% growth in Net Profits. 1QFY12 has seen the growth momentum continuing with both Sales and Net Profits registering ~56-60% growths. The company has guided for 40% growth in sales for FY12.
  • Reducing Debt – Debt is down to just 6 Cr in FY11 from ~23 Cr in FY10. That such stupendous growth is being achieved while reducing debt is heartening to note. Debt-to-Equity stands at just 0.15. With the ongoing rights issue proceeds, the company intends to repay its term loans and become a DEBT-FREE company in the near future, as per its 2011 Annual Report .
  • Reducing Working Capital requirements – Working Capital/Sales reduced to an astonishing 3.38% in FY11 as compared top ~15% of Sales in FY10. This is achieved on the back of increasing dealer advances and is a positive trend.
  • Increasing Cash Flows – Atul Auto has been increasing its cash flows handsomely in recent years. Cash flows from Operations grew to 16.72 Cr in FY11 from 9.58 Cr in FY10. With Bulk of the Capex undertaken in FY07-09 (~8 Cr each year), the company has been registering good levels of free cash flows. Capex requirements for existing platforms looks to be easily funded from current cash generation levels.
  • Increasing Dealer Network – With a current market share of less than 3% of total 3-wheeler market in India, Atul Auto is striving to increase its distribution reach beyond Gujarat. The company is expanding its presence in Andhra Pradesh, Rajasthan and Maharashtra while entering new markets such as Kerala, Karnataka, Bihar and Assam.
  • Export Foray – Atul Auto Ltd has started exports in Nigeria, Kenya, Egypt, Tanzania and some other African countries. It has also recently introduced Atul Gem Diesel & CNG variants in Bangladesh. Exports touched 3.2 Cr in FY11.
  • Expansion Plans – Atul Auto has been actively exploring expansion plans. It is in the fray to acquire the ailing Scooters India Ltd which also manufacturers front-engine 3-wheelers. It is also actively looking for technology partners for manufacturing 4-wheeler LCVs.
  • Strong sales in Q2FY12- Atul Auto Ltd has informed BSE that the Company has recorded total Sales of 6794 Vehicles in the quarter of July -September 2011, as against 4814 Vehicles of July-September 2010 Quarter, or a 41% growth in number of vehicles sold. This is on the back of the ~60% sales growth registered in Q1FY12.
  • Increasing dividends & yield – The company has consistently increased dividends in the last 2 years leading to a 5yr dividend CAGR of over 44%. At CMP of 98, the dividend yield is 3.27% (post rights capital basis).

Bearish Viewpoints

  • Heavily dependent on Suppliers – Atul Auto sources its engines from Greaves Cotton. Although this has been a long-term relationship, this complete dependence on one supplier can be a big risk.
  • Aggressive expansion plans – Although nothing concrete has yet been announced but the company’s expansion plans are a source of concern – whether it is acquiring the ailing Scooters India or investing into greenfield 4-wheeler LCV manufacturing, a much more competitive and technology intensive segment. There are big execution and market risks associated.
  • Litigations against the Company – 67 cases of litigation is filed against the company totaling 12.83 Cr. Of this 11.17 Cr is against one case filed by Lombardini, Italy with whom the company had entered a technical collaboration in 2006. To be fair, the company itself has filed a litigation against Lombardini for 43.08 Cr. The company had suffered heavy damages and had to recall and replace eventually some 8500 engines by 2009, due to this ill-fated venture.

Barriers to entry

  • Entrenched Players – The 3-wheeler market is dominated by entrenched players like Bajaj and Piaggio. Setting up manufacturing and a country-wide dealer network from scratch is an uphill task for new players.

Interesting Viewpoints

  • Strong Dealer Advances – As on 31st March, 2011 the company has 3.37 Cr as advances from dealers against 36 lacs in the previous year. This reflects good acceptance of Atul’s products in the market and is a very positive development for the company. If sustained, this could be key to reduced working capital needs of the company.
  • Rear-Engine 3 wheeler growth – India is pre-dominantly a Rear Engine 3-wheeler market. Atul had started with Front-Engine technology (Atul Shakti) and introduced rear-engine 3 wheelers in 2007-08 in collaboration with Lombardi which faced trouble with the engines (Read this case study for a great backgrounder on the company). These problems seem to have been bested and the rear-engine 3-wheeler Atul Gem (recorded a 144% growth in Sales in FY11.

Disclosure(s)

Donald Francis: Less than 5% of Portfolio in the Company; Holding for more than 2 years