AnandRathi
Atul Auto (Buy)
CMP: ₹225.35
Target: ₹350
Key takeaways: a) The company has a run rate of 4,000-5,000 units a month at 76 per cent utilisation. It has put up a 60,000-unit plant, which would commence in Mar’20. This new capacity would also cater to demand in the southern and northern regions. We expect the scale-up to take 1.5 years and expect the entire 120,000 capacity to be available by FY22.
These two regions account for only 25 per cent of the company’s sales but have a more or less equal number of dealers. However, we believe it would be difficult to capture market share from Bajaj Auto and Piaggio. Growth, thus, may not be exponential. Also, the company is set to launch BS-VI vehicles in February 2020.
Q2 FY20 result takeaways: 1) Average realisation rose 6 per cent q-o-q, driven by a 1.5 per cent price hike as well as the revenue contributed by spare parts; 2) Gross profit per vehicle increased 17 per cent q-o-q, but EBITDA per vehicle was down a slight 4 per cent q-o-q;. 3) Dealer inventory is 40-45 days; 4) Capex ₹800m for FY20 and ₹500m FY21.
Valuation: After the sharp fall, the stock trades at an attractive 8.8x FY20e PE. We expect revenue to register an 8 per cent CAGR (to ₹7.63bn) and PAT to record a 7 per cent CAGR (to ₹64 crore). Given the inexpensive valuation, we see potential and upgrade our recommendation to a ‘buy’, at a target price of ₹350.
Risks: Lower-than-expected volume growth.
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