Not Tata Motors or Maruti, this Auto Stock Could Produce a Surprise in 2023 

Hello everyone, Rahul Shah here, trying to make investing accessible and profitable for the average investor.

For today's video let us travel back in time to the 1970s.

This was the time when a gentleman named Jayantibhai, was a scrap trader in the Saurashtra region of Gujarat and was trying to make ends meet selling scrap.

Then came the turning point in his life.

The then king of Jamnagar had a few golf carts that were nearing the end of their useful life.

So, he decided to scrap them and gave the responsibility to Jayantibhai.

But Jayantibhai wasn't willing to dispose them in a hurry. He was intrigued by the engines mounted on the golf carts.

You see, In those days, Jamnagar wasn't the busy, industrial town that it is today.

It was a rather sleepy place where public transport was virtually non-existent, and people relied on slow, creaking bullock carts.

It didn't take long for Jayantibhai to figure out that these golf cart engines could be a far better substitute for bullock carts to move people and goods around.

So, in a classic case of 'Indian Jugaad', Jayantibhai decided to fit these engines to a few cycles and in this way, Atul Auto's first ever product, which locally came to be known as 'Chhakada' or 'Chhakado' became an instant hit.

Yes, the auto stock that I am going to discuss today is none other than Atul Auto, one of India's largest three-wheeler companies.

So, after launching the Chhakado, Atul Auto was now in business.

Soon, Chhakadas were everywhere in Saurashtra and other parts of Gujarat. They became the popular vehicle of choice for carrying people as well as goods in the interiors of the state.

In fact, Bollywood movies that revolve around Gujarati culture like Hum Dil De Chuke Sanam and Ram Leela have given the colourful Chhakadas a pride of place on the big screens.

Just as thanda matlab Coca-Cola or making a copy meant Xerox, last mile connectivity in remote areas of Gujarat started to mean 'Chhakadas'.

While there was no doubt that the Chhakada became a roaring success, credit to Jayantibhai and his team that they did not rest on their laurels.

They always remained hungry for innovation and growth and always scouted for new opportunities to grow their business further.

So, after moving from petrol chhakadas to diesel chhakadas to even three-wheeler chhakadas, it was time to make inroads into a brand-new category.

In those days, there was no reliable mid-sized goods carrier in the market. There was the 350 kg goods carrier and then there was directly the 3-tonne carrier. It was a market that was almost ready to explode with the right kind of product.

Enter Atul Auto's goods carrier, first with the 750 kg carrying capacity and then with the 500 kg payload vehicle.

And thus, another phase in Atul Auto's illustrious growth journey had begun.

Sales grew at a CAGR of 35% between 2000 and 2005 with profit growth not far behind.

Maybe even the company did not anticipate this scorching pace of growth. For soon, it started facing capacity constraints. Plans had to be drawn up to start a brand-new facility.

Well, it was here that things started going downhill. First, it faced engine supply issues from Greaves Cotton and then, its own engine that was developed in-house, began giving problems within the first few months of ownership. In a nutshell, there were challenges on many fronts.

Needless to say, financial performance suffered, and the company had to go back to the drawing board.

That it would bounce back strongly wasn't entirely unexpected. And although it took a little longer than expected, the turnaround was mighty impressive.

What followed was one of the most prolific periods in the company's history.

One look at the company's financial performance and you'll know why.

It sold 4x more vehicles in FY20 than it did in FY10.

It recorded 5x greater revenues in FY20 than it did in FY10 and.

Last but not the least, it recorded 12x higher profits in FY20 than it did in FY10.

So, after looking down and out, the company bounced back and had arguably, its most successful decade ever.

The reason behind the company's stellar performance during the decade was aptly summed up by its Finance head, Mr Jitendra Adhia in an interview back in October 2020.

Atul Auto Ltd is completely dependent on a single product platform, that is, three-wheelers - it is our bread and butter - we don't manufacture anything else. One good, very unique point about Atul is that it has the complete range of three-wheelers.

It has products in both the 0.5 tonne and 0.35 tonne categories, a presence in both cargo and passenger carriers - coupled with almost 24 customised applications on three-wheelers - front engine and rear engine three-wheelers, as well as products in diesel, petrol, CNG, LPG and electric segments.

That pretty much sums it up, isn't it? The reason Atul Auto has been able to grow faster than the market is because of the dogged determination of its management, its ability to continuously roll out new products and its constant efforts to target new geographies and regions.

All of this put together has made the company a force to reckon with in the 3-wheeler space.

I know what you are thinking. This happens to be a stock market video and yet, there is no mention of the company's wealth creation during its difficult yet colourful journey of the last 20 years.

Well, I spoke about company's rocking performance between FY10 and FY20 where topline grew by 5x and the bottomline by an even more impressive 12x.

What about the share price performance though? Is it as good as the company's financial performance? Well, the answer is a resounding yes.

Consider this. The stock closed the financial year 2010 at a price of Rs 12.7 per share. Ten years later i.e. by March 2020 and before the Coronavirus led crash, the stock had touched a high of Rs 370 per share.

From Rs 12.7 per share to Rs 370 per share in 10 years translates into the stock being a whopping 30-bagger, an impressive appreciation whichever way you look at it.

Therefore, the stock has not just created wealth for its management as well as its employees, it has created immense wealth for its shareholders too over the last 10-12 years.

However, the past is all good but what about the future? Is the future as exciting as the past?

To be honest, the company's performance in both FY21 as well as FY22 hasn't really been up to the mark.

On account of headwinds, both in the economy as well as the sector, the company has reported losses in both these years.

And it was reflected in the company's share price performance like I mentioned at the start.

I recommended the stock back in November 2019 and had to exit with small gains of only 24% over 3 years, on account of the company posting one loss after another.

However, the situation has improved in the current fiscal. The company has turned EBITDA positive for the first time in six quarters.

The volume guidance by the management is also encouraging and, in all likelihood, the company should return to strong profitability by the end of next fiscal.

Now, this is interesting? If the company is likely to return to profitability in FY24, why has the stock price jumped up so much in recent times?

If the recovery is more than a year away, what explains the current up move in Atul Auto?

Well, the current up move is undoubtedly due to the improving fundamentals of the company. However, it is also because of Vijay Kedia, one of the most influential investors in the country and also a big shareholder in Atul Auto, calling the company the Tesla of the 3-wheeler industry in India.

Yes, that's correct. Vijay Kedia believes that with all the work the company has put into launching an electric 3-wheeler, Atul Auto can very well be crowned the Tesla of this space.

Now, I think it is this piece of news that has sent the stock market into a tizzy. Anything that has to do with electric vehicles or green energy or drones is attracting investor interest these days and the same seems to be the case with Atul Auto.

But is this hype justified? Let us do a simple analysis to figure out.

You see, if you look at the earnings history of the company, its earnings power can be assumed as Rs 20 per share. Now, the company has doubled its capacity. So, with a capacity of 60,000 vehicles per year, it managed to earn Rs 20 per share on an average.

Now, with the capacity doubled to 1.2 lakh vehicles per year, it will be fair to assume that the earnings power can also double over the next 3-4 years if not earlier. So, an earnings power of Rs 40 per share is what the company could be capable of achieving in the future.

I believe that the company deserves a PE multiple of 15x if not more.

A PE multiple of 15x and earnings power of Rs 40 per share gives us a fair value of Rs 600 per share over the next 3-4 years.

The stock is currently trading at Rs 320 per share or thereabouts. This gives us an expected upside of 17% CAGR over the next 4 years on our estimates of the stock's earnings power and a PE multiple of 15x.

A CAGR of 17% is pretty decent in my view and this makes the stock an attractive investment should you believe that it can indeed achieve those numbers over at least a 4 year period.

However, if you ask me, I would not like to buy the stock at its current price of Rs 320 per share.

My ideal buy price would be in the region of Rs 200 to Rs 225 per share.

And here is the reason why. You see value investors like me would like to earn returns on the current earnings power of Rs 20 per share and not like to pay a premium just because the stock will earn Rs 40 in the future.

The current fair value of the company based on its current earnings power is Rs 300 per share. And we value investors like to make money on this Rs 300 per share and not on the future fair value of Rs 600 per share.

Therefore, we like to buy the stock at Rs 200 to Rs 225 per share so that we make 40%-50% on Rs 300 per share.

A growth investor on the other hand like to earn money based on the stock's future earnings power and future fair value. And therefore, even if he has to pay a premium and buy the stock at Rs 300 to Rs 325 per share, he is ok with it.

As long as he is earning his 15%-20% CAGR over a period of 3-4 years, he doesn't mind buying it at a much higher price than a value investor.

Therefore, if you have the mindset of a growth investor and you are convinced that Atul Auto can earn a minimum of Rs 40 per share, you can certainly consider investing in the stock at the current price.

However, if you are like me, a true blue value investor and want the future growth for free, you can wait for the stock to fall further and trade within my buy range.

You can make money with both the approaches provided your growth expectations aren't too exorbitant and you are not paying a very high PE multiple to the stock for this growth.

So, first decide who you want to be. A growth investor or a value investor and then decide accordingly.

This brings me to the end of this video. Hope you liked it. I will see you again next time. Good bye and happy investing.