Atul Auto Limited: Strong Industry Dynamics Should Stem Growth
Growth drivers in near term include network expansion, penetration in domestic market, exploring overseas market, launch of e-vehicles in potential domestic market and developing various application and upgradation of existing product portfolio. Strategic tie-ups involving leading banks and NBFCs should offer retail financing for vehicles. Automobile industry should seek support from factors like availability of skilled labour at low-cost, strong R&D centres, and low-cost steel production.
Company Overview:
Atul Auto Limited emerged as only player having complete range of 3-wheeler products across fuel range - Diesel, Petrol, CNG, LPG and Electric. The company has been categorized as fastest growing 3-wheeler company in India, having presence across 21 states with 200 primary and 130 secondary networks. Its dealership, sales, service, and spare parts network spans over 600 touch points across globe. Opposed to industry veterans, Atul Auto is one of youngest & fastest growing companies. R&D team keeps constant check on routine production and works on developing innovations. Atul Limited has emerged as only player having complete range of 3-Wheeler products across fuel range- Diesel, Petrol, CNG, LPG, and Electric.
Growth Enablers of Atul Auto
- Opportunities to Capitalize On: Whole automobile industry is transforming and focuses on greater safety and greener environment. Given importance of automobile industry to economy, potential for generating job opportunities and its backward and forward linkage with other sectors, Government has been supportive. Government is pursuing plan for electrification of vehicle fleet and it announced FAME II policy. Industry has been gearing up for meeting this challenge on technology and product fronts. Given required technology support and R&D strength, Atul Auto is moving forward to have electric 3-wheeler with Lithium-ion battery.
- Stable Liquidity Resources Should Support Capital Needs: Atul Auto maintained debt-free status till fiscal 2020. As a result of increased investment for installation of Ahmedabad plant, liquid assets saw a reduction from INR1892 lacs on March 31, 2019 to INR106 lacs as on March 31, 2020. Atul Auto has sanctioned working capital facilities of INR1500 lacs from IDBI Bank, working capital facilities of USD 3.50 Million and term loan of INR9000 lacs from Export - Import Bank of India which have not been used as on March 31, 2020. Complete availability should help meet future business needs. Liquid assets of the company remained INR1,760 Lacs as on Mar 31, 2021. It has been sanctioned working capital facilities worth INR1500 Lacs from IDBI Bank, working capital facilities worth INR3.50 Million or equivalent INR which is available to meet expenses.
- R&D Activities Provide Earnings Growth Visibility: The company saw a busy year for R&D activities as norms for transition from BS IV to BS VI emission were carried out before implementation date, which was April 01, 2020. Development activities were running in full swing so that business opportunities in e-vehicle can be grabbed. Strong foundation of R&D provides the company an edge over its competitors. In FY21, the company was able to strategically control its R&D expenses because of unforeseen situation due to COVID-19 pandemic. Moving forward, it plans to concentrate on innovative, environment-friendly and practical automobile vehicles given changes in market trends with help of increased R&D investment.
- Sound Ratings Profile: CRISIL Ratings reaffirmed its ‘CRISIL BBB+/Negative/CRISIL A2’ ratings on bank facilities of Atul Auto Limited. They believe that the company is an established player in 3-wheeler industry, making up ~5% of domestic market share. The company caters to demand for passenger, cargo, petrol, diesel, liquid petroleum gas, and EVs. Distribution network is spread across India.
- Strong Domestic Strength: India is one of largest manufacturers for 3 wheelers, producing volume of ~12,50,000 units p.a. and should grow at 6-8% p.a. in medium term. Potential in Indian market can be seen as 3-wheeler is categorised as an important element of transportation of goods in this country. Atul Auto is having strong domestic strength with network spanning across 220 primary dealerships, 35 satellite dealerships and 88 sub-dealerships. The company’s presentation claims that export markets include developing and under-developed countries like Bangladesh, Sri Lanka, Indonesia, African countries and Latin American countries.
- Favourable Industry Dynamics Should Lend Support: Domestic production of automobiles saw ~2.36% CAGR between FY16–FY20, with 26.36 million vehicles manufactured in India in FY20. Domestic sales of automobiles exhibited 1.29% CAGR between FY16–FY20, with 21.55 million vehicles sold out in FY20. Automobile exports reached 4.77 million vehicles in FY20, showcasing CAGR of 6.94% during FY16-FY20. Two wheelers accounted 73.9% of vehicles exported, followed by passenger vehicles at 14.2%, 3 wheelers at 10.5% and commercial vehicles at 1.3%. Sales of EV, excluding E-rickshaws, saw a 20% growth and reached 1.56 lakh units in FY20. Industry attracted Foreign Direct Investment worth USD24.21 billion between April 2000 and March 2020, per Department for Promotion of Industry and Internal Trade.
- Unwavering Government Support Should Help Revive Automobile Sector: Government of India encourages foreign investment in automobile sector. It allowed 100% foreign direct investment under automatic route. As per Union Budget 2019–20, Government decided to provide additional income tax deduction of INR1.5 lakh on interest paid on loans taken for purchasing EVs. Government has plans to develop India as global manufacturing centre and R&D hub.
Key Trends in Automobile Industry
Selling of passenger vehicles, two-wheelers and three-wheelers has remained challenging over past couple months, with shortage of chips impacting output across local industry and manufacturing hubs. Prices of vehicles can soar in India due to rising input costs and Russian invasion of Ukraine. Industry experts believe that waiting period for deliveries can be longer due to ongoing semiconductor crisis, which can get worse as a result of conflict. Some people believe that input costs can see a spike because of higher crude oil and aluminium prices.
Lower Valuations Provide Investment Opportunities
Atul Auto is having a market cap of ~INR38,641.98 lakhs and a free float market cap of ~INR18,141.10 lakhs. Its stock is trading at ~34.4% below its 52-week high. The company compounded its total revenues at ~4.24% between FY16-FY20 and its PAT at ~2.53%. It has compounded its EPS at ~2.54% over FY16-FY20. In coming periods, this growth should further increase, with sound balance sheet, network expansion and increased presence in domestic market acting as primary growth enablers. Atul Auto has emerged as a powerful company with 3-wheeler vehicles across entire fuel range – petrol, diesel, CNG, LPG and electric. Strong presence across entire country has been targeted by leveraging large 3-wheeler brand portfolio. Planned strategies have helped it expand its reach globally.
With new range of alternate fuel 3W (Petrol/ CNG/ LPG) and economic activities being recovered, Atul Auto expects having deeper penetration in existing markets and entering into new countries so that international business can see expansion. Going long on Atul Auto should be considered given its strong foundation of R&D, supportive industry dynamics, market share and sound ratings profile. Khushbu Auto Finance Limited has been revived and supports products of Atul Auto for retail finance to end users.
