Atul Auto - Buy the Rights Issue

Atul Auto (AAL) is tapping the market with its Rights Offer, whereby the company is offering one share for every four shares held by shareholders, at Rs 30. At the time of writing this analysis, AAL was quoting at Rs 99. The record date for the Rights entitlement is 5th September, 2011. The issue opens on 15th September, 2011 and closes on 29th September, 2011. The company plans to raise Rs 4.38 crore through this Rights Issue.

AAL plans to raise funds for the following purposes:

• To repay a term loan amounting to Rs 3.23 crore
• Towards business expansion in more states across the country, amounting to Rs 1 crore
• Expenses towards Rights Issue to an extent of Rs 15 Lakhs

AAL manufactures three-wheelers in the Sub 1 tonne category, targeting the passenger and cargo segment. It has a manufacturing facility in Rajkot, with a manufacturing capacity of 24000 vehicles per annum. All of the company’s vehicles are approved under BS II and BS III.

AAL has also installed two windmills at Gujarat and Rajasthan, with a power generation capacity of 0.6 MW and 1.25 MW respectively. It meets 94 per cent of its power requirements through captive consumption from windmills in Gujarat, and earns a regular income of around Rs 52 lakhs from the sale of power to the State Electricity Board from windmills in Rajasthan. Since 2006, AAL has also been continuously rewarding its investors, by way of dividends.

In FY11, AAL manufactured and sold 19398 vehicles, translating into a utilisation rate of around 80 per cent. This was majorly led by the launch of its new brand ‘Atul Smart’, as well as greater volumes achieved in the sales of its other brands. With a robust demand for its products over the past year, the company has estimated a healthy utilisation rate in the years to come.

However, we have observed that the company has a mere three per cent share in the three-wheeler auto segment, which is majorly dominated by giants like Piaggio, Bajaj and M&M, among others. Moreover, the management shut down its Hardiwar plant in 2008, due to low sales volume and an overall slowdown in the economy. With similar concerns cropping up in the economy, where high cost of borrowing is impacting vehicle sales, we believe that any slowdown in the company’s operations would be detrimental to its operations and finances.

AAL has chalked out several plans, such as acquiring land in Ahmedabad to set up facilities for manufacturing ultra light four-wheeler commercial vehicles, setting up assembly plants for three-wheelers in Bangladesh, exploring ventures in Sri Lanka and acquiring stakes in the PSU firm, Scooters India. However, the company has not mentioned these plans in its prospectus for the Rights Issue. We believe that the company must concentrate on materialising these plans and opening up marketing offices in various states, rather than repaying its debt, as it is already pretty close to being debt-free.

On the financial front, the company reported a topline growth of 69 per cent, with revenues standing at Rs 202 crore, on the back of a rise in volumes and price hikes undertaken in FY11. The bottomline grew by 107 per cent, as a result of lower interest outflow. Going forward, the management expects a 40 per cent growth in revenues for FY12. However, given the current concerns surrounding the auto sector, we believe that this will be a fairly daunting task for the company.

On the valuation front, the company is currently trading at 6.81x its post issue TTM EPS of Rs 14.53.

In conclusion, the only positive of this Rights Issue is the issue price, which is at a whopping 70 per cent discount to its CMP. The management has been unavailable to comment on the reason for this investor-friendly discount. So, we, at DSIJ, recommend our readers to subscribe to the issue, as it would be a foolish decision to skip such an opportunity. 

As the record date has already elapsed, we advise rights holders who do not wish to park additional capital in the counter to adopt a strategy of selling 7.4 per cent of their stake now on the current price, and applying for rights using the same capital. For example, if you hold 1000 shares as on date, we advise you to sell 74 shares, which will yield a capital of Rs 7500 at CMP. On the date of rights, you can apply for 250 shares at Rs 30 each with the same capital of Rs 7500.

Issue Information