Above industry average growth, launch of petrol 3-wheelers have made Atul Auto analysts’ pick

Atul Auto’s sales grew 6% in the last quarter of 2015-16, compared to the same period last year. A 3% increase each in volume and earnings per unit, due to a better product mix, helped the three-wheeler manufacturer to achieve this growth. Due to the fall in commodity prices, the company’s earnings before interest, tax, depreciation and amortisation (EBITDA) rose 16% year on year (y-o-y). And net profit zoomed 26% y-o-y due to improved operational efficiency.

Atul Auto has witnessed impressive volume growth for the last several years—29% per annum between 2009 and 2016—compared to that of the domestic three-wheeler industry as a whole—6%. Though volume growth has moderated in the past two years, it is mostly because of lower rural demand, triggered by bad monsoons. Since monsoon is expected to be normal this time, volume growth should pick up again.

Though Atul Auto is expected to beat the industry growth rate in 2016-17 as well, volume growth may not reach previous peaks because of the increasing challenges the company faces. For instance, three-wheeler market leader Bajaj Auto’s entry into the commercial three-wheeler space in 2015-16, has reduced Atul Auto’s share. Regional disturbances and the fall in crude oil prices, have adversely impacted the company’s exports to Africa. Exports fell 33% in the fourth quarter y-o-y, mostly on account of non-availability of US dollars in Nigeria.
Though value added tax-related issues in Gujarat resulted in some volume loss, they have been sorted out and volumes should be back to normal from the second quarter of 2016-17. To take on competition, Atul Auto has introduced a petrol variant of three-wheeler for passengers in four states, Gujarat, Rajasthan, Punjab and Haryana. Because of a positive response from these states, the company is planning to introduce the petrol variant in other states as well. Atul Auto is also increasing its capacity by another 60,000 units in Ahmedabad at a cost of Rs 150 crore, funded by internal accruals.

Stabilisation of the export market, which will happen once the dollar scarcity eases in Africa, and the playing out of normal monsoon will be the two key triggers for this counter. The margin expansion is also expected to continue in 2016-17 due to better operational efficiency and economy of scale as volumes rise.
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