Hold Atul Auto; target of Rs 505: ICICI Direct

Atul Auto’s Q4FY16 revenues were at Rs. 130 crore, up 5.9% YoY (volume up 2.5% YoY to 10,251 units) vs. our estimate of Rs. 128 crore EBITDA margins contracted 321 bps QoQ to 13.4% vs. estimate of 15.1% largely on the back of higher other expense, up 205 bps QoQ to 7.6%. Also, higher raw material cost (up 52 bps QoQ) & employee expense (up 64 bps QoQ) impacted margins. PAT was at Rs. 10.9 crore (up 25.7% YoY) vs. our estimate of Rs. 12.2 crore. The management has clarified that the tax issue has been sorted out in Gujarat and volumes are likely to normalise, going forward. However, we believe the damage has largely done for Q1FY17E in the middle of a sluggish demand (both domestic & export) scenario. Further, we believe margins are likely to flatten out as the benefit of higher ASPs & product mix would largely be offset by higher raw material cost, going forward. Hence, we cut our earnings estimates and multiple.

Atul’s specialised focus has clearly paid rich dividends as evidenced by market share gains in the past. However, currently, we believe AAL being a small player would face key challenges in both domestic and export market amid stiff competition in the 3-W space (with BAL entering the goods segment). Capacity addition in a subdued environment may result in higher overheads cost along with raw material prices, which seems to have peaked out. This would largely offset the benefit of higher ASPs and better product mix leaving lower scope for margin expansion. Thus, we cut our estimates & multiple. Hence, we revise our target price downward to Rs. 505, (valuing 17x its FY18E EPS) with a HOLD rating on the stock.For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.