Buy Atul Auto; target of Rs 565: ICICIdirect

ICICIdirect.com is bullish on Atul Auto and has recommended buy rating on the stock with a target of Rs 565 in its June 13, 2014 research report.

“Atul Auto (Atul) has been steadily gaining volumes (9649 units in Q4FY14, ~14 percent YoY higher). Thus, revenues at Rs 112.6 crore grew ~16 percent YoY but came lower by ~9 percent QoQ (owing to seasonality). Margins, however, came lower by 135 bps YoY and ~165 bps QoQ and were a drag on profitability. PAT at Rs 8.5 crore (~12 percent YoY increase) was aided by lower tax rate (~25 percent tax rate for Q4FY14).” “Atul Auto’s growth trajectory has been impressive with volumes growing at ~40 percent CAGR in FY09-14 even as the domestic three-wheeler segment has grown at ~7 percent CAGR over the same period. Volumes have been improving on the back of added dealerships and increasing geographic presence along with market share gains in existing markets. Atul’s volumes have grown in both the passenger and goods carrier segments where Atul has benefited from the launch of its rear-engine vehicle Atul Gem in 2009, which has helped to serve a wider audience. Currently, Atul is present in nearly all states barring Tamil Nadu and West Bengal. Also, the dealer network comprises 190 primary dealers and ~110 sub-dealers across the country. The management has guided that the number of primary dealerships will rise to ~240 by the end of FY15E. This is likely to help meet the management target of 20 percent volume growth for FY15E. Atul has attained a pan-India presence over the past three or four years, establishing its brand in these new markets and gaining market share, which has grown from 2.0 percent in FY09 to 7.7 percent in FY14. However, one of the major shortcomings of Atul has been the lack of petrol engine products, which is more in use in urban areas. With the management guiding that the new petrol engine product will be launched in the next nine to 12 months, we believe Atul’s volumes are likely to remain on the uptrend. The petrol product is also likely to boost export volumes with the management expecting exports to grow exponentially on a low base.” “We feel Atul’s specialised focus has clearly paid rich dividends as evidenced by market share gains. We believe with further capacity addition and new petrol product launch, Atul can efficiently tap export markets along with urban market in India and, thereby, continue the strong growth momentum. The sharp rally in stock price over the past two years has reflected the same. However, looking at the strong growth potential coupled with strong balance sheet and robust return ratios, we believe valuations at 9.5x FY16E EPS still remain attractive. We value Atul at 12x FY16E EPS to arrive at a TP of Rs 565 and recommend BUY,” says ICICIdirect.com research report.

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