This article provides in-depth fundamental analysis of Atul Auto Ltd, an Indian three-wheeler commercial vehicle manufacturer.
I thank Amit Gupta, one of the readers of the website, for putting in the time & effort to analyse Atul Auto Ltd and sharing his analysis with the author & the readers. Amit has done a very good and detailed analysis of Atul Auto Ltd, which would be helpful for anyone trying to explore Atul Auto Ltd as an investment opportunity or learn stock investing in general.
In order to benefit the maximum from this article, an investor should focus more on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc used to get the information. This will help her in improving her stock analysis skills.
Atul Auto Ltd Research Report by Reader
Q: Dear Vijay, I had written to you a few days back on your blog about Atul Auto but you asked me to research on other parameters also.
I tried putting my points under various heads mentioned on your blog in the attached file. I have not done the valuation at this point because right now, I am just looking at business and its performance.
If you can give your views on this then it will be really helpful.
Thanks
Financial Analysis of Atul Auto Ltd
A) Analysis of Profit and loss statement
1) Sales Growth & Profitability
We can see that over last 10 years (2005-14), Atul Auto has increased its sales at a healthy rate of 16% per annum. It has been able to maintain its operating & net profit margins (OPM & NPM) at levels of 9-11% and 5-7% respectively.
2) Tax Rate
The healthy tax paid rate above 30% can be used to infer that company has been paying taxes due to it, which is a healthy sign.
3) Interest coverage
Interest coverage ratio is recently at the exceptional level because the company has paid off its debt and now it’s a debt free company. This is a sign of a healthy company.
B) Analysis of Balance Sheet
1) Debt to Equity ratio
Debt to equity ratio of Atul auto has been reducing consistently from 1.27 in 2008 to 0 in 2014 as the company is using the cash generated from profits to pay off its debt. Decreasing debt levels reduce interest costs and thereby improve the profitability of the company. If you revisit the profitability table above, Atul auto’s net profit margin increased from 4% (2010) to 7% (2014), which is the direct result of decrease in debt of the company.
2) Current Ratio
Current ratio of Atul Auto is currently 1.9 and has been consistently above 1 meaning that current assets are sufficient to take care of current liabilities.
C) Analysis of Cash Flow Statement:
We can see that Atul auto has been consistently generating cash from its operations and using it for capital expenditure and paying off debt. If we refer to the Debt to Equity ratio above, it would substantiate this conclusion as debt of Atul auto has become zero.
D) Cumulative PAT vs Cumulative CFO
If we compare the cumulative PAT and CFO for last 10 years (2005-14), we realize that company has collected cash more than its profits. It indicates that the company is able to collect its profits in cash and it is not stuck in receivables & inventory. It is a good sign for a healthy company.
Conclusion
After analysis of financials of Atul Auto Ltd for last 10 years (2005-14), I realized that it is growing at a healthy growth rate while maintaining good profitability margins. Atul auto is able to increase its sale by capacity expansion without overly leveraging its balance sheet, as it has been using cash generating from operations to pay off its lenders and company has zero debt at this point.
Business Analysis of Atul Auto Ltd
A) Comparison with Industry Peers
We see that Atul Auto has outperformed most of its peers over last 10 years (2005-10). Its net profit margin (NPM) is one of the best in the industry. As discussed during financial analysis, we can notice that the growth of ACML has not come at the cost of impairment of capital structure. Atul auto is one of the most conservatively financed companies in its industries, which is reflected by comparison of its D/E ratio with its peers.
B) Increase in production capacity and sales
The above table indicates that the sales growth achieved by Atul auto over last 5 years has been contributed both by product-price increase (measured by price per vehicle sold) and increased quantity of product sold. The growth has come mainly from increase in quantity sold which shows that they are expanding its reach in markets by selling higher quantities.
C) Conversion of Sales Growth into Profits
We can see that though the profit margin has been fluctuating over the years, it has still been able to maintain it at respectable levels of 5-7%.
D) Conversion of Profits and cash
The above table reflects that the profits are flowing to the company as cash. Profits are not being stuck in the receivables and inventory. This is a good sign.
E) Creation of Value for Shareholders from the Profits Retained by the Company
We can see that the company passed the test of creating at least one INR of market value generation for its shareholders for each INR profits retained by it over last 5 years.
Conclusion
Upon testing Atul Auto at all the 5 parameters to judge the business performance, we can safely conclude that it has passed on all the five parameters. It has demand for its products in the market that it is able to tap by selling higher quantities. Its profits are not being stuck in receivables & inventory and are realized as cash. The cash generated is being utilized productively in capacity expansion and debt reduction and it has created equivalent market value for its shareholders.
Operating Efficiency Analysis of Atul Auto Ltd
Inventory turnover ratio and asset turnover ratio is improving continuously from 2008. It shows that company is able to get rid of its inventory soon and able to utilize its fixed assets in a better way. Days of receivable outstanding also has come down from 27 to 8.5, which is approximately same in last few years. This shows that company is able to convert its sales into cash on time.
As we have seen in the earlier section, the company has grown with a decent 15% CAGR in last 10 years and able to maintain its profit margins. The cumulative CFO in last 10 years is also more than cumulative PAT of last 10 years. In addition, they are using CFO only to fund its future growth and paying off its debt.
All the above-mentioned parameters show that the company is managing its operations efficiently and they are improving with time.
Management Analysis of Atul Auto Ltd
A) Salary of Promoters vs Net profits
I am not sure what all should be included in promoter salaries so here, I have included the remuneration and reimbursements given to managerial personnel and their relatives. It has shown a decreasing trend in the past whereas the profits are increasing.
B) Dividend Payments
We can see that net profits of Atul Auto increased at a growth rate of 24% during 2006-2014 and the company rewarded its shareholders by increasing its dividends at growth rate of 35%. This is the sign of a shareholders friendly management.
C) Promoter and FII Shareholding
Promoter shareholding has been decreased in last few years but still it is above 51% whereas FII investments have increased from a single institution.
Dr Vijay Malik’s Response
Dear Amit,
First, I appreciate you for the time and effort put by you in analyzing Atul Auto Ltd in detail. The compiling of data like production capacity, utilization levels, promoter’s salaries etc. require a lot of diligent effort of scanning through past annual reports, which tests the patience of the investor. I congratulate you for the good work done by you.
You have highlighted most of the important parameters for analysis of Atul Auto Ltd and provided relevant interpretations. These would prove to be very helpful for all the readers.
Financial Analysis of Atul Auto Ltd:
You have rightly pointed out that Atul Auto Ltd has been growing its sales at a good pace of 15-20% over the years, which has picked up in last 5 years to about 30%. Moreover, this growth has been achieved while improving the profitability. Profitability margins (both OPM & NPM) have been improving year on year. Operating profit margins (OPM) have improved from 9% in FY2012 to 12% in FY2015.
Similarly, net profit margins (NPM) have improved from 0% in FY2009 to 8% in FY2015. Sales growth with improved profitability is the first sign of any exciting investment opportunity.
As mentioned by you, the growth is mainly because of increase in the quantity of products sold, indicating that the company has successfully penetrated deeper into existing markets and created opportunities in the new markets. This is a healthy sign for growth of the company.
Atul Auto Ltd has been paying taxes at 30-33% rate, which being near to standard corporate tax rate in India, is another good sign.
Operating Efficiency Analysis of Atul Auto Ltd:
You have rightly pointed out that over the years; Atul Auto Ltd has been reflecting improved operating efficiency. This is shown by increasing fixed assets turnover and inventory turnover.
(Read: 5 Simple Steps to Analyse Operating Performance of Companies)
Net fixed asset turnover (NFAT) has increased from 2.7 in FY2008 to 9.0 in FY2014, which is a remarkable improvement. It has a straight impact on the self-sustainable growth rate (SSGR) of the company.
Atul Auto Ltd currently has a Self-Sustainable Growth Rate (SSGR) of 32%, which has increased from negative levels in the past. Such dramatic improvement in SSGR is because of remarkable improvement in almost all the parameters determining business strength of any company.
Both NPM & NFAT have improved over last 4 years remarkably and as a result, Atul Auto Ltd could achieve its fast-paced growth without needing additional capital. An investor would notice that the debt of Atul Auto Ltd started reducing FY2011 onwards and soon it turned debt free. Total debt of Atul Auto Ltd has decreased from INR 34 cr. to FY2008 to INR 0 in FY2013.
(Read more about determining Self-Sustainable Growth Rate of companies in this article: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company)
As rightly mentioned by you, Inventory turnover ratio of Atul Auto Ltd has improved a lot over the years. It has increased from 10.7 in FY2011 to 18.6 in FY2014. Receivables days are almost stable at 7-9 days, indicating that the credit terms with customers are stable over the years.
The efficient working capital management by Atul Auto Ltd has ensured that all its profits have been converted to cash flow from operations. PAT for last 10 years (FY2005-14) is INR 97 cr. whereas the CFO over the similar period is INR 147 cr. This is a good sign.
Atul Auto Ltd has been paying regular dividends to its shareholders. It amounts to sharing the fruits of growth with shareholders. These are signs of a shareholders’ friendly management.
Share market too seems to have recognized it. The market capitalization of the Atul Auto Ltd has increased by INR 902 cr. against retained earnings of INR 138 cr. over last 11 years (FY2005-15). Management has created a value of INR 6.54 for the shareholders from every INR 1 of earnings retained & not distributed to shareholders.
Margin of Safety in the market price of Atul Auto Ltd:
Atul Auto Ltd is currently available at a P/E ratio of 22.6, which means that the price already factors in the good aspects of the company and does not offers any theoretical margin of safety as described by Benjamin Graham in his book The Intelligent Investor.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Analysis Summary
Overall, Atul Auto Ltd appears to be a company growing at a decent pace, with improving profitability margins & operating efficiency. Improved net fixed asset turnover, NPM and efficient working capital management has ensured that Atul Auto Ltd can fund its growth from its profits and does not need to depend on additional capital. High Self-Sustainable Growth Rate (SSGR) has led to Atul Auto Ltd becoming debt free. Its SSGR also indicates that Atul Auto Ltd has the potential for sustained growth.
These are my views about Atul Auto Ltd. However, you should do your own analysis before taking any investment related decision about Atul Auto Ltd.
An investor may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
Hope it helps!
Regards,
P.S.
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Disclaimer
Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.
