Amtek Auto: Taking A Big Fall

The fortunes of Amtek Auto, one of the largest automotive component manufacturing companies of India, have gone through a terrible spin in the wake of a huge debt burden and an abrupt global economic slowdown

According to the Automotive Component Manufacturers Association of India (ACMA), the Indian auto component industry has targeted about 8 to 10 per cent growth in FY16. The expected domestic market potential will be USD 66 billion and the export market potential will be USD 12 billion for the automobile component industry in FY16. After a sluggish business environment for the automobile industry, the market seems to be finding some rays of hope in the wake of the new majority government that assumed power last year. Also, the automotive manufacturers and auto component manufacturers have started showing some traction. However, despite the improving macro-economic factors and expanding manufacturing capacity, Amtek Auto (AML) tanked more than 70 per cent in the last one month on the bourses. The dramatic price fall of the stock of this major auto ancillary company raised the eyebrows of investors. We are therefore taking a closer view of the fundamentals of AML.Business Model

AML is one of the largest automotive components manufacturers in India. The company is engaged in forging, grey and ductile iron casting, gravity and high-pressure aluminum die casting and machining and sub-assembly. AML supplies components for passenger cars, light and heavy commercial vehicles, 2/3 wheelers, lightweight commercial vehicles and heavyweight commercial vehicles. The company has facilities across India, the United Kingdom, Germany, Brazil, Italy, Mexico, Hungary and the United States. It also manufactures components for non-auto sectors such as the railways, specialty vehicles, aerospace, agricultural and heavy earth-moving equipment.

The company's various products include:

• Flywheel Ring Gears: AML's combined ring gears manufacturing capacity is one of the largest in the world. Its multi-location set-up provides a wide reach across the global automotive market. The manufacturing lines are highly automated and have modern ring gears’ manufacturing equipment.

• Machining: Complex machining of a variety of engine, transmission and suspension components.

• Forging: Available screw presses for up to 10 kg forgings, hammers and up-setters for up to 200 kg forging.

• Casting Aluminium: Gravity and high-pressure die casting.

• Casting Iron: Highly intricate small castings between 200 g to 10 kg weight range, SG and grey iron castings of 200 g to 300 kg weight range, horizontal moulding lines - HWS and GFD, vertical moulding lines - DISA - 2110, 2013, 2070.

Huge Inorganic Growth

AML was to acquire three companies in the current financial year i.e. FY15. It acquired the iron and aluminium casting, forging and machining business of Japanese company Asahi Tec Corporation. The business has an annual revenue of USD 375 million. Asahi Tec Corporation has three manufacturing facilities in Japan, two in Thailand and a strategic holding in a joint venture in China.

AML also acquired Scholz Edelstahl GmbH of Germany. Scholz is a high-quality hot die forging manufacturer for both auto and non-auto component industries with annual turnover of around Euro 175 million. Scholz also provides customized solutions for steel services and product support out of a facility located in Essingen, Germany.

AML signed a contract to acquire REGE Holding GmbH in Germany. Rege, through its subsidiaries, provides machining and assembly of components for both auto and non-auto industries. Its Germany operations are conducted from three state-of-the-art plants, two in Germany and one in Romania. Its key products include common rails, connecting rods, crankcases, cylinder heads, gear housings and valve bodies. Rege’s annual revenues stood at Euro 200 million.

One of the top finance executives of AML who wished to remain anonymous answered our queries, saying, “The company was on a kind of purchasing spree across the globe in a bid to become a very big player in the auto ancillary space and create a kind of monopoly so that by building huge capacity and focusing on quality, the margins on its products can be improved.”

Doubling the Debt Burden

AML drove a strong inorganic development strategy over the last few fiscal years. The Amtek Group made 21 acquisitions in the last three years. The Group's overall debt has been increased during the same period. AML's debt to equity ratio increased to 2.42 as of FY14 while it was at 1.44 in FY12. Its total debt almost doubled to Rs 15,169 crore as of FY14 from Rs 8,228 crore in FY12. Amtek's total debt stands at about Rs 22,828 crore in its books. A senior finance executive said, “While acquiring companies at a global level the company obviously raised huge debts from the market and that has clearly made the balance-sheet of the company highly leveraged.” According to the company management, AML is going to cut its debt to about Rs 1,500 to 2,000 crore at the end of the next fiscal year by exploring various options; however, there is no concrete strategy to reduce this debt.

Worsening Financials

AML follows September 31 as its financial year end. During the last quarter result, AML's standalone revenue showed worsening of 18.61 per cent to Rs 866 crore in Q3 FY15 as compared to the same period in the previous financial year. The financials of AML got further deteriorated as its raw material cost increased by 34.48 per cent during the June 2015 quarter on a yearly basis. As a result, its EBITDA decreased by 47.98 per cent to Rs 173.83 crore in Q3 FY15 as compared to the same period in the previous financial year. The EBITDA margin too contracted considerably by 1,133 basis points to 20.07 per cent in Q3 FY15 on a yearly basis. With the ever increasing interest cost for AML, its EBIT slumped by 87.51 per cent to Rs 30.67 crore in Q3 FY15 on a yearly basis AML's interest expense increased by 106.17 per cent to Rs 236.54 crore in Q3 FY15 on a yearly basis.

When you look at the current financial year 2015, the first nine months’ performance was too disappointing considering the way AML increased its capacity over the last three years and the improving macro-economic environment for the automotive industry in India. For the first nine months of FY15, AML's revenue decreased marginally by 0.59 per cent to Rs 2,940 crore on a yearly basis. However, the EBITDA witnessed considerable decrease of 14.58 per cent to Rs 780 crore in 9M FY15 compared to the same period in the previous financial year. Its interest cost shot by 72.53 per cent to Rs 536 crore in 9M FY15 on yearly basis. AML had exceptional income of Rs 180.24 crore in Q2 FY15. If we exclude this exceptional income, the company reported net loss of Rs 272 crore in 9M FY15 whereas it had net profit of Rs 249 crore in 9M FY14. AML's financial performance legacy was good till FY14. But the incremental heavy debt troubled its financial performance in the first three quarters of FY15.

A Red Flag

As an impact of the worsening financials, the rating agency CARE Ratings revised its rating for long-term loans and non-convertible debentures of AML from AA to AA- in the month of May. Further deteriorating the situation, the CARE Ratings took an ultimate stand and suspended AML’s ratings on August 31, 2015 as the company failed to furnish required information. The current liquidity crunch started affecting other group entities which borrow money from the flagship company, AML.

The Joint Lenders Forum (JLF) consisting of Bank of Maharashtra, Bank of India, Andhra Bank and Karnataka Bank are examining the case of delaying payments of Castex Technologies, one of AML’s subsidiary. When asked by the stock exchanges, AML informed that it was facing some temporary cash flow mismatch. Meanwhile, institutional investors, both foreign institutional investors (FIIs) and domestic institutional investors (DIIs), too started selling their positions in the company as a result of which institutional holdings in AML contracted by 495 basis points to 35.30 per cent as of June 30, 2015 in just a single quarter.

Stock Price Fiasco

The main drama started when the leading stock exchange, National Stock Exchange, announced the exclusion of AML from Future & Option (F&O) segment with effect from October 30, 2015 after considering AML’s poor financial performance in current FY15. The shares of AML crashed almost 63 per cent in consecutive four trading sessions and also touched a six-year low on the bourses.

The pain did not stop for AML after losing two-third of its market capitalization; the other Amtek Group companies viz. Castex Technologies, Metalyst Forgings and JMT Auto too took a dramatic beating after this fiasco. The share price of Castex Technologies declined by almost 40 per cent and JMT Auto's share price also reduced by almost 43 per cent since the NSE announcement. The Metalyst Forging share price is now trading at a 52-week low with a 43 per cent slide since then.

Conclusion

Though AML’s management had infused Rs 75 crore earlier and expressed an interest to infuse a further Rs 75 crore in the coming 12 to 18 months along with the overall debt reduction of Rs 1,500-2,000 crore over the next couple of years, the existing debt burden of AML and its group companies is too gigantic compared to its fund infusion and planned debt reduction. Hence we are of the opinion that AML's liquidity crunch problem would impact its operations considerably in the coming days.

According to the company’s senior finance executive, “Despite this, debt is not the sole problem. The real problem is the global slowdown that struck abruptly in a shocking way, which is more grave than expected. Due to this on the one hand debt financing cost has become huge whereas the topline and operating margins declined drastically during Q1, creating havoc for the company. So the real problem is that the slowdown struck at a wrong time for the company and what we are seeing is the impact of that on the company’s finances.”

Further, the credit ratings downgrade and JFL’s investigations will create considerable problems for the company to raise further funds or rather restructure its debt burden. Hence, we recommend adopting a cautious stance for investing in AML till the company starts reducing the debt and shows improvement in its financials.