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Weak quarter; expect robust volume recovery ahead; maintain Buy

* Atul’s Q2FY22 loss of Rs45mn came in above our estimate of Rs19mn loss due to the lag in passing on commodity inflation to customers. The company reported revenues of Rs820mn, a negative 31% CAGR compared with Q2FY20. We expect a turnaround to start from H2FY22E on higher volumes.

* We see a strong rebound in 3W demand in the coming quarters in both the passenger and cargo segments, aided by the opening of educational institutions/hospitality sector, better macros, and replacement demand. EV penetration is also likely to increase due to the government’s thrust and favorable cost of ownership.

* Given the poor performance in H1FY22, we reduce FY22E volumes by 5% to 21,571 units while broadly maintaining FY23/24 estimates. Following the revision, we expect a robust 43% CAGR in volumes over FY22-24E.

* 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 Dec’22 TP of Rs305 (Rs300 earlier), based on 10x Dec’23E EPS (Sep’23E earlier).

Weak quarter: Revenues grew by 7% yoy to Rs820mn (est.: Rs866mn), below estimates due to lower-than-expected realizations. Revenues are still notably lower, at -31% CAGR in comparison with Q2FY20 levels. EBITDA was negative at -Rs46mn (est.: +Rs1mn) vs. +Rs22mn/+Rs201mn in Q2FY21/Q2FY20. The EBITDA miss was due to the lag in passing on commodity inflation to customers and higher other expenses. Consequently, adjusted PAT was -Rs45mn (est.: -Rs19mn) vs. +Rs7mn/+Rs177mn in Q2FY21/Q2FY20.

Improving market presence: Management is continuing its 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 both domestic and overseas markets. In addition, the launch of a new lithium-based electric vehicle is expected in the next 2-3 quarters.

Maintain Buy: We build in volume/revenue CAGRs of 43%/47% over FY22-24E. EBITDA margin is likely to improve from 0.5% in FY22E to 12.1% in FY24E. Currently, valuations are inexpensive at 10x/7x P/E on FY23E/24E EPS. We maintain Buy with a TP of Rs305, based on 10x Dec’23E EPS. 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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