It is 6 am on a Monday and the four-lane highway between Rajkot and the industrial cluster of Shapar is buzzing with activity. Like most roads in Gujarat, the stretch is smooth and has the usual assortment of cars, trucks and buses. But even in the early morning melee of office-goers and traffic bottlenecks, it is difficult to miss the rows of three-wheelers snaking down the side of the road.
Their large numbers suggest they are the preferred mode of travel for workers living far from the factory belt. And it’s easy to understand why. Not only do the three-wheelers offer a flat rate of Rs 5 for every 18 km, almost half of what state buses charge, they also drop the workers till the factory gate. Small entrepreneurs are also known to use these three-wheelers to transport a range of items, as a vehicle with a payload of 500 kg can carry as much as 700 kg.
It is in this crowded lane that Atul Auto has, quietly but surely, made its presence felt. Set up in 1992, it is in the last five years that the company has emerged as a promising automaker, focussed on the three-wheeler market.
With 37,500 units sold in the financial year ended March 2014, the numbers are still small. (Bajaj Auto sold 4.47 lakh in the same period. Piaggio is its other competitor). But as Raamdeo Agrawal, joint managing director of Motilal Oswal and an investor in Atul Auto, explains, the outlook is buoyant. “This is a simple business. Three-wheelers are the poor man’s transport and, as we are urbanising, we will need a lot more of them,” points out Agrawal.
As if on cue, Atul Auto’s revenue has grown at a compounded rate of 29 percent in the last five years. Its dealership network now has a pan-India spread. Operations have streamlined and, as the company pushes ahead, it plans to add a second plant and double its capacity to 1.2 lakh units a year by 2017.
Niraj Chandra, son of founder Jayantibhai J Chandra, is leading the rapid growth plan. As the wholetime director of the company, he realises that besides the balance sheet, Atul Auto needs to work on its mindset. The 38-year-old has taken on the onus of engineering this change. The time Niraj has invested in learning the ropes helped in this effort. In the 12 years since he joined the company, he has moved between five departments. In his latest stint, he has put himself in charge of human resources; his aim is to get people to up their game to match the growth mindset.
For instance, a senior manager was sent to a workshop on presentation skills conducted by lifestyle and self-help guru Deepak Chopra. Niraj asked another executive to attend a conference on best practices in supply chain management. “If you train your people to start thinking about growth that is sustainable and replicable, half the battle is won,” he says.
This year’s agenda includes an aggressive push into the export market. In 2013, India exported more than 3.5 lakh three-wheelers. Atul’s share: 600 units. The company plans to fix this and has started working on a petrol engine for the export market. (Three-wheelers sold in India primarily run on diesel.) “The company is working to ensure that growth is sustainable,” says Niraj.
It did stutter in 2007, due to faulty production. Now that the time is ripe to bet big, Niraj hopes that lessons learnt then will help avoid another hitch.
It was in the 1970s that Jayantibhai Chandra, then a scrap trader in Jamnagar, Gujarat, found himself staring at a unique opportunity. The then Maharaja of Jamnagar had imported a few golf carts that had reached their end of life; he was looking to dispose of them and the task was given to Jayantibhai.
However, once Jayantibhai laid his hands on the engines, he decided to put them to use. In those days, Jamnagar was a sleepy town; public transport was non-existent and people relied on slow, rickety bullock carts. In an early example of Indian jugaad, Jayantibhai fitted the engines to a few cycles. The contraption, which came to be locally known as a ‘chhakada’, was an instant hit.
Once it was tested, users said they would like a diesel engine as a petrol one was proving expensive. In those days, no one made small diesel engines except for Greaves Cotton (for submersible pumps). Once Greaves developed a diesel engine, Atul Auto was in business.
The company, which was manufacturing this ingenuous contraption, got its first real push in 1986 when Jayantibhai decided to move into the three-wheeler business and started scouting for land near Pune in Maharashtra. There was no help from the state government and the endeavour proved to be more difficult than he had anticipated. The company eventually set up shop in Rajkot in 1992.
The commercial vehicles sector of the late 1980s and early 1990s looked considerably different from what it is now. This was a full decade before the arrival of Tata Ace, which, with its one-tonne carrying capacity, has had the most successful commercial vehicle launch in the last 25 years. There were either small three-wheelers with 350 kg carrying capacity or massive three-tonne mini trucks; these would often be plied at a loss. “It was a market where the right product would sell very well,” says Jitendra V Adhia, vice president (finance), Atul Auto.
It was this vacuum that Jayantibhai chose to fill with a 750-kg carrying capacity vehicle. The move worked out well, warding off competition from Pune-based Force Motors, the only other company in the space.
By 2000, after having got its hands dirty in the three-wheeler category, Atul launched a 500-kg payload diesel vehicle. By then, Bajaj and Piaggio had also entered the market, and the sector was growing at a healthy 30 percent a year. Simply put, there was space for everyone. Soon, Atul made a name for itself in the market for front-engine vehicles. Company executives remember those as heady times as sales grew at a CAGR (compound annual growth rate) of 35 percent between 2000 and 2005, and Atul Auto established dealerships in Uttar Pradesh and Madhya Pradesh.
By 2007, as its brand was beginning to gain traction in the northern market, Atul Auto was running out of production capacity. It decided to set up a new plant in Haridwar. That was when things unravelled.
Atul Auto was too dependent on Greaves Cotton for its engines. Since it was its smallest customer, Greaves Cotton would cut its supply when faced with too much demand. In fact, not having its own engine continues to be a strategic vulnerability for Atul Auto, says an analyst.
In 2006, Atul Auto tied up with Lombardini, an Italian manufacturer of diesel engines. But Lombardini’s engines failed to perform under Indian conditions. After six months, complaints began to pour in and dented Atul Auto’s brand image. There was bad publicity at a time when the brand was trying to make inroads in north India. “Those were difficult times for the company. But we overcame those difficulties through consolidation and focusing operations back in Gujarat,” says Niraj.
Usually, it is up to the manufacturer to take care of warranty-related repairs for engines, but Lombardini had not yet set up a service centre network in India and it was left to Atul to salvage its image. This set the company back by three years and dented its profitability. Adhia recalls going to Jayantibhai and asking him to defer salary hikes for a year. Jayantibhai refused. All employees were given a modest hike and a decision was taken to hit the brakes on rapid expansion and regroup at Rajkot.
As the team sat down to assess the product line-up and plug the gaps in their portfolio, it took a strategic decision to work on a gradual geographic growth. There would be no big-bang moves. Besides, so far, Atul Auto had been very successful with products that had a front engine. But 92 percent of three-wheelers sold in India had rear engines. To compete in a much larger market, Atul Auto had to add this to its product line. THE ROAD AHEAD
The results are showing. The stock priced at 20 times earnings is factoring in some of this growth. In one year, it has risen by 178 percent from Rs 188 to Rs 523 (as of July 15). The company finished financial year ended March 2014 with Rs 430 crore in sales and a net profit of Rs 29.85 crore.
At present, Atul Auto’s balance sheet is debt-free. Its reserves and earnings over the next two years will be enough to pay the Rs 150 crore it needs for the second plant slated to come up near Ahmedabad (construction starts next year). Its working capital cycle is negative. Vehicles are dispatched only after cash is received while vendors are paid at an average of every 28 days.
Being in Rajkot, Atul Auto has to keep some inventory and it is not able to operate on a just-in-time basis which would reduce margins. However, it makes up for it through lower labour costs in Rajkot. Once the company moves to Ahmedabad, the scale will tilt the other way: Labour costs will go up but being closer to vendors, demand will steer production and inventory costs will go down.
At 11.3 percent, Atul Auto’s Ebitda margins are much lower than other auto companies. Adhia says the company plans to improve it by 50 to 150 basis points every year. A key part of his plan is to progressively reduce dealer margins. And producing in higher volumes will be integral to his strategy.
For now, Atul Auto has its plans set on a steady 20 percent expansion in the domestic market. It aims to close this year selling 45,000 units in India and plans to sow the seeds of a strong export business once a petrol engine is in place. Agrawal of Motilal Oswal indicates that this industry could become a three-way fight between Bajaj, Piaggio and Atul Auto in the years to come. “Once that happens,” says Agrawal, “it will be a very healthy business.”
(This story appears in the 05 September, 2014 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)