Amtek Auto

AMTEK AUTO: The company continues to pick up assets and clients and could soon end up being India’s biggest auto parts maker.

Striking when the iron’s hot. That’s something Amtek Auto, India’s second largest auto components maker, has been doing quite well.

Over the past seven years, the Delhi-based firm, which is expected to post revenues of Rs 4,000 crore plus in FY07, has made six overseas acquistions, giving it 10 manufacturing bases overseas. It’s no surprise that Amtek’s stock price has appreciated ten-fold over the last five years from just Rs 40 to Rs 420 today.

Amtek Auto’s latest buy is an aluminium foundry in the UK, with a capacity of about 20,000 tonnes per annum. At $35 million, the deal is valued at around 0.6 times sales.

That doesn’t seem too high a price even if JL French (Witham) – the seller – is in deep trouble, and its plant running at just over half the capacity. It posted revenues of around $60 million last year and barely managed to stay out of the red.

What’s more, as Ramnath S, who tracks the automobile space at SSKI Securities, points out, “JL French has capabilities in product design, high pressure die casting and precision machining. Also, Amtek gets some brand new customers like PSA Peugeot, a top of the line name.”

Like it has done with assets that it bought out earlier, this time too Amtek will shift JL French’s 18 production lines back to its Pune plant over the next three to four years. The idea is to make cheaper aluminum castings which are used extensively by the automotive industry.

Says Santosh Singhi, CFO,“ Once we shift the entire capacity back home, we will have a total of 40,000 tpa and that should give us better economies of scale. In any case, we should save at least 30-35 per cent on labour costs by manuafcturing in India rather than in the UK.”

Adds Ramnath, “It should be possible to scale up the operations of the JL French facility with minimum capital expenditure.” Indeed, Singhi believes that once production is ramped up to match the capacity, profits from the JL French unit should be close to $10 million compared with less than $ 1 million currently.

In fact, that’s precisely why Ford Motor, one of JL French’s bigger customers, recommended that Witham sell off the assets. Ford even agreed to up prices by about 3-4 per cent so that the unit could become more profitable.

Explains Arvind Dham, chairman, Amtek “In such deals, it’s important to have the approval of key customers. Besides, customers realise there has to be some solution to the problem, so they’re willing to look at price hikes.”

So while Ford can surely hope to source cheaper components from Amtek, the Indian firm’s client list, which already boasts of marquee names such as BMW, Hyundai, CNH Global, Scania, Delco Machining, Land Rover and Renault, should also gain from the company’s more efficient operations. Umesh Karne of Emkay Securities expects Amtek’s operating margins to expand by at least 200 basis points in the next two years.

Currently, over 70 per cent of Amtek’s consolidated revenues come from sale of components to passenger car makers. With a new set of customers, this share could go up further.

Meanwhile, Dham talks about a merger between Amtek Auto, in which the promoters have 33 per cent and Amtek India, also an auto ancillary firm, in which they have 38 per cent. “We have been doing some re-organising because we have so many companies and a merger is on the cards,”he explains.

So, will Amtek overtake Bharat Forge to become India’s biggest component maker? Dham asserts that he doesn’t want to make comparisons but says Amtek is hoping to achieve a turnover of Rs 7,000 crore in three years, using both the organic and inorganic routes.

For perspective, market leader Bharat Forge posted consolidated revenues of Rs 4,178 crore in FY07. While Amtek Auto should register sales of around Rs 4,000 crore for the year ending June 2007, the numbers are not comparable because Amtek’s revenues include several inter-segment transfers.

Says Karne, “Amtek may not become bigger than Bharat Forge, unless it does more acquistions than the latter, but it should remain a very close second.” No mean achievement this.