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Weak quarter but expect volume improvement ahead; maintain Buy

* The Q1FY22 loss of Rs62mn came in below our estimate of a Rs86mn loss. Losses continued due to lower scale. Atul reported revenues of Rs322mn, a negative 53% CAGR compared with Q1FY20. We expect a turnaround from Q2FY22E on higher volumes.

* We see a strong rebound in 3W demand ahead in both passenger and cargo segments, aided by the easing of lockdowns, better macros and replacement demand. EV penetration is also likely to increase due to government thrust and favorable cost of ownership.

* Factoring in weak Q1FY22, we reduce FY22E volumes by 12% to 22,760 units. We also trim FY23E/24E volume by 4% each to 37,210/43,834 units. Despite this, we expect a robust 39% CAGR in volume over FY21-24E.

* Atul continues its efforts to strengthen its market presence by: 1) increasing penetration in CNG/LPG segments; 2) improving credit access through its finance arm; 3) increasing presence in key export markets; 4) launching new products; and 5) expanding distribution reach. Retain Buy with a TP of Rs300 (Rs260 earlier), based 10x Sep’23E EPS (Mar’23E earlier).

Weak quarter: Given the low base in Q1FY21, results have been compared with Q1FY20 (2- year CAGR). Revenues stood at Rs322mn (-53% CAGR), slightly below our estimates. Volume saw a negative 59% CAGR. Realization witnessed a 15% CAGR. EBITDA was negative at -Rs64mn (est.: -Rs98mn) vs. Rs182mn in Q1FY20. The EBITDA beat was driven by inventory gains. Overall, adjusted PAT was negative at -Rs62mn (est.: -Rs86mn).

Improving market presence: Management continues efforts to strengthen presence by: 1) increasing presence in alternative-fuel vehicles (Petrol, CNG and LPG) and electric vehicles; 2) improving credit access through its group finance arm, Khusboo Finance; 3) increasing market penetration in major countries in Africa, Asia and Latin America; 4) launching new products; and 4) expanding sales & service network in the domestic market. In Mar’21, Atul launched new products in the alternative fuel (CNG, LPG and Petrol) segment in India. They are expected to be launched in the export markets in H1FY22. In addition, the launch of a new lithium-based electric vehicle is likely in H2FY22.

Maintain Buy: We build in volume/revenue CAGRs of 39%/42% over FY21-24E. EBITDA margin is likely to turn around from -3% in FY21 to 12% in FY24E. Currently, valuations are inexpensive at 9x P/E on FY23E EPS. We maintain Buy with a TP of Rs300 (Rs260 earlier), based on 10x Sep’23E EPS (Mar’23E earlier). Key downside risks: delay in demand recovery in key geographies, failure of new products, high competitive intensity, and further increase in commodity prices.

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