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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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