Amtek Auto

Investors with a two-three year perspective can consider fresh exposures to the Amtek Auto stock at the current market price of Rs 425. The stock, which trades at around 14 times the estimated FY-08 earnings, has cooled off considerably from its 52-week high of Rs 526 recorded in end-October. A diversified product and client base, thrust on exports and foray into the high-margin aluminium castings business inspire confidence about the company’s earnings prospects. Any decline in stock price related to the broader markets can also be used to step up exposure.
Business and Financials

Amtek Auto is in the forgings business, manufacturing engine, transmission and suspension parts and assemblies for the automobile industry. It derives 60 per cent of its revenues from clients in the four-wheeler segment. The two-wheeler and commercial vehicle segments chip in with the rest. Top customers include Maruti, Hyundai, Hero Honda, Bajaj Auto, Tata Motors, Ford and General Motors.

For the quarter-ended September 2007, standalone sales stood at Rs 311 crore, growing by 32 per cent on a year-on-year basis. While strong growth from key customers such as Maruti aided domestic sales, export sales got a boost from more outsourcing of components by its overseas subsidiaries.

A decline in overall capacity utilisation levels due to the ongoing capacity expansion took a toll on the standalone operating margins, which fell to 27.2 per cent from 30.7 per cent in the corresponding previous quarter.
Acquisitions to drive growth

The buoyancy in the domestic automobile industry, coupled with the increased outsourcing by global auto majors to low-cost countries such as India, will be the key revenue driver for the company. Besides, the company’s strategy of acquiring front-end capacities near global OEMs (original equipment manufacturers) in the US and European markets will also drive growth. This is because these acquisitions help the company adopt a ‘dual shore manufacturing model’ under which offshore locations could be used as a technical hub with emphasis on product design, development and manufacture of high-value critical components, while Indian facilities could be used in high-volume production due to their low-cost advantage. For the company, this model brings in three benefits. One, optimisation of costs and, two, product diversification and, three, added clientele.

The company’s acquisition of the assets of the UK-based JL French (Witham) Ltd in June this year is an extension of this strategy. This acquisition has added JLF’s aluminium casting business to Amtek. This augurs well for the company as OEMs are looking at substituting engine and transmission parts made of iron with aluminium, as it is lighter, stronger and more fuel-efficient.

Moreover, aluminium components also bring in better margins. During the first quarter, the company has commissioned a new facility at Ranjangaon, Maharashtra, for manufacturing aluminium castings with a capacity to produce 40,000 MT by FY-08. It plans to shift JL French’s manufacturing lines from the UK to India over the next 2-3 years.

The company is also expanding its forging and machining capacity which is expected to be completed by FY-08. This will help the domestic operations cater to 40-60 per cent of the overseas requirements, from the 20-40 per cent levels now, paving the way for increased localisation and, hence, reduced costs.

While the JLF acquisition has given access to customers such as Peugeot, Land Rover and Jaguar, the acquisition of the precision machining companies — Triplex components and Kelton — based in the UK in November this year has also brought in customers such as Dana Spicer, Honeywell, Perkins, TRW and Toyota (UK).
Likely boost from exports, re-rating

The company derives around 55 per cent of its revenues from overseas and given the increasing opportunities for outsourcing, exports are likely to receive a fillip. Besides, a majority of its exports are to Europe with the US bringing in less than 5 per cent of the revenues thus reducing the risk of losses due to depreciation of the dollar against the rupee.

The consolidation of Amtek Auto with Amtek India, a group company manufacturing castings, is also on the cards. Synergies from consolidation such as product line expansion, economies of scale and settlement of issues relating to transfer pricing between the group companies (Amtek India and its subsidiary Sigmacast Iron supply castings to two of Amtek Auto’s subsidiaries), are expected to trigger a re-rating for the stock.