The Hindu Business Line : Amtek Auto: Buy

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.

Top customers in India include Maruti, Hyundai, Hero Honda, Bajaj Auto, Tata Motors, Ford and General Motors. Over the years, the company has followed a policy of inorganic growth and subsidiaries now contribute around 70 per cent of the consolidated earnings.

Last week, the company had reported that it was likely to incur a loss of up to $18 million (Rs 72 crore approximately) in the next two years on its exposure to currency hedges and swaps. Although this loss trims earnings expectations for the next two years, the company’s has good long term prospects. A varied product and client base, capacity expansions, foray into aluminium castings and diversification into the non-auto component business, make this stock a good addition to your portfolio. Attractive valuations of around 12 times FY-08 consolidated earnings (after considering the disclosed forex loss) inspire us to reiterate a ‘buy’ for a long-term investor.

Diversification

As a diversification bid to outride the slowdown in the auto sector, Amtek Auto too has joined companies such as Bharat Forge to enter into the non-auto segment. The company has formed a joint venture with American Rail Car Industries to manufacture railway wagons in India. Capacity for this is being set up at Rajasthan by its JV partner and the company is expected to begin operations in June 09. The company is also setting up a facility to manufacture components for these wagons. The railways’ focus freight traffic and setting up of dedicated freight corridors are expected to aid the demand for wagons in the next few years.

Aluminium castings business

The company’s acquisition of the assets of the UK-based JL French (Witham) last June 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 commissioned a new facility at Ranjangaon, Maharashtra, for manufacturing aluminium castings with a capacity to produce 40,000 tonnes by FY-08. It plans to shift JL French’s manufacturing lines from the UK to India over the next two-three years. 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 — has brought in customers such as Dana Spicer, Honeywell, Perkins, TRW and Toyota (UK).

Capacity expansions

The company is 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, leading to increased localisation and reduced costs.The company is also expected to receive a boost to its revenues from supplying components such as ring gears and connecting rods to the Nano, for which it has already acquired 25 acres of land at Singur.

Financials

For the quarter ended December 2007, consolidated revenues grew by 21.7 per cent to Rs 1,198 crore. While margins remained flat at 19.9 per cent, consolidated profits grew by about 10 per cent to reach Rs 107 crore. With two acquisitions in the past year, capacity expansions and new ventures margins may be sedate over a few quarters due to integration costs, higher interest and depreciation charges. Escalation in raw material costs could also dent margins.

More Stories on : Automobile Components | Stocks | Recommendation

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Madras Cements: Buy

Does the IIP offer clues to corporate growth?

Templeton India Equity Income Fund: Invest

DBS Chola Opportunities Fund: Invest

Graphite India: Buy

Amtek Auto: Buy

Index Outlook

Diversification or Di-worse-ification?