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Light to emerge at end of tunnel, unlock beneficiary…

About the stock: Atul Auto (AAL) is a prominent 3-W manufacturer based out of Gujarat with broad-based presence across segments and fuel types.

* Fourth largest 3-W player with FY21 domestic market share at 7.1% (10.3% in cargo segment and 5.1% in passenger segment)

* History of healthy capital efficiency as well as positive cash flow generation

Q3FY22 Results: The company posted dismal Q3FY22 results.

* Revenues rose 14% QoQ to | 91.3 crore amid 12.5% volume growth to 5,168 units and 2% ASP increase to | 1.76 lakhs/unit

* Margins came in negative at -8%, down 235 bps QoQ

* Consequent loss was at | 8.5 crore

What should investors do? AAL’s share price has de-grown at ~18% CAGR from ~| 470 in April 2017, heavily underperforming the Nifty Auto index in that time.

* We retain our BUY rating on AAL tracking impending launch in the EV space and believe the company to benefit from reopening of schools and colleges

Target Price and Valuation: We value AAL at revised target price of | 210 i.e. 20x P/E on FY24E core auto business and 1.3x P/B to investment in subsidiaries

Key triggers for future price performance:

* We build ~19%, ~22% volume, revenue CAGR, respectively, in FY21-24E on depleted base aided by economy re-opening, easing of 3-W financing worries

* Introduction of own lithium ion 3-W offering would be key to combat technological disruption in the space

* Post loss at PAT (FY21-22E), AAL is seen clocking ~| 19 crore PAT by FY24E

* Higher utilisation to spur margins, RoCE to ~8% levels by FY24E

Alternate Stock Idea: Besides AAL, in our coverage we like Tata Motors

* Long term value drivers (EV transition, deleveraging & FCF focus) intact

* BUY with target price of | 550

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