Why I Recommended a SELL on Vijay Kedia’s Favorite Stock

Which is why missing a SELL recommendation at the top is not one of the things I regret.

However, Atul Auto is one of those rare stocks where I am regretting a premature SELL call. Simply because the stock is up 22% from my SELL price and that too in just a couple of weeks.

The worst part is that my subscribers had to hold on to the stock for more than 3 years in exchange for 24% gains.

Did you get the irony?

The stock took more than 3 years to gain 24% but took just a couple of weeks to rise another 22%.

In other words, had I not given my SELL call, my subscribers would be sitting on a much more respectable 50% gains than the 24% they earned. An opportunity missed I would say.

Anyways, bygones are bygones and there’s very little I can do about this turn of events so to speak.

What we can certainly do is try and figure out this sudden interest in the stock and whether this rally is sustainable.

But before we talk about the future, it is important to take a peek into the company’s past.

It won’t be an understatement to say that Atul Auto was one of the top auto stocks in India between FY10 and FY20 when its topline grew by 5x and bottomline by an even more impressive 12x.

This growth was backed by an aggressive strategy by the company’s management to enter as many 3-wheeler segments as it can and to expand into multiple geographies.

As you can surmise, the move paid off big time. The company recorded solid growth and won laurels and admiration galore.

What about the share price performance though? Was 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 ₹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 ₹370 per share.

From ₹12.7 per share to ₹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 not just created wealth for its management as well as its employees, it created immense wealth for shareholders too.

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 the 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% 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 upmove in Atul Auto?

Well, the current upmove 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.

However, it is my view that all this excitement around Atul Auto’s foray into electric 3-wheelers is a bit premature.

And therefore, we are better off assigning little to no value to this business.

We should be focussed on the core business for now and our buy or sell decision should be based entirely on whether the core business appears undervalued or overvalued.

You see, the earnings power of Atul Auto based on its historical performance seems to be in the region of ₹20 per share. Of course, it has recorded EPS of as high as ₹25 per share in the past and you can very well consider that to be its earnings power if you want too.

However, for the sake of conservatism, ₹20 is what I would like to assume.

Apply a PE multiple of around 15x to the earnings power and you get a fair value of the company of around ₹300 per share.

Well, the stock currently trades in the range of ₹350 per share.

Therefore, from my perspective, the extra ₹50 is a premium that the stock market seems to be giving to the stock for its new ventures like EVs and other growth efforts that the management seems to be making.

Whether this extra ₹50 is justified, or it should be even more, is entirely your call and based on your understanding of the business and your faith in the execution capabilities of the management.

I recommended a SELL on the stock because I felt the stock was adequately valued from a 1-2 year perspective. Maybe your reading of the situation and stock’s future earnings power is different than mine.

After all, as Ben Graham says, the stock investor is neither right or wrong because others agreed or disagreed with him, he is right because his facts and analysis are right.

I have shared all the facts and given my reading and analysis of the whole situation. Now it is up to you to come up with your own estimates and numbers.

Whatever you do, please do not base your decision on emotions or sentiments or what the other investors think.

Have a proper, independent rationale irrespective of whether it turns out to be right or wrong. This way, you will develop a sound framework which would hold you in good stead over the long term.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com