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Amtek Auto: Conference call excerpts - Views on News from Equitymaster

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Amtek Auto: Conference call excerpts

Mar 17, 2006

We had recently conducted a conference call with Amtek Auto Limited, a leading forging and machining company in India. Here are the key takeaways from the same. What is company’s business?
Amtek Auto Limited, incorporated in 1985 is currently engaged in manufacture of a wide range of components for automotive applications mainly for use in engine, transmission and suspension systems. In the domestic automotive market, it is a Tier-1 vendor and a supplier to almost all the leading automobile original equipment manufacturers (OEM). Amtek has expanded its manufacturing base from a single manufacturing facility to a multi-location setup and today it operates from five locations in India. Apart from this, in the past few years, the company has been on an acquisition spree in the overseas market. It has acquired Smith Jones Inc in the US, GWK group in the UK and Zelter Gmbh in Germany. It also has a 62% stake in Ahmednagar Forgings (AFL).

Segmental (domestic) % revenues
Passenger car (mainly AAL) 40.0%
Two-wheelers 35.0%
Commercial vehicles (mainly AFL) 15.0%
Replacement market 10.0%
AAL - Amtek Auto, AFL - Ahemadnagar Forgings
Segmental spread: The company, together with AFL, has a diversified presence in the forgings and machining business. The table below highlights its presence across different automotive segments. The management has clarified that the OEM market will be given top priority. Margins in both OEM and replacement markets are comparable.

Raw material costs and steel prices: Raw material costs (as a % sales) increased significantly from 53% in FY00 to 65% in FY05. This was due to the fact that because of sluggish demand, the company was not able to pass on the increase in steel prices commensurately, despite the fluctuations in steel price being a pass-through. Going forward, the company expects input costs as % of sales to decline on the back of softening steel prices.

Expansion plans: Amtek has invested around Rs 7 bn to Rs 7.5 bn during FY05 and FY06, with the amount being almost equally bifurcated between the two years. From FY07 onwards, the company plans to incur only the routine capital expenditure. Volume expansion plans are enlisted below.

Time horizon for commercial production
Company (including domestic subsidiary) FY05 Planned Time horizon
Forgings (Tonnes per annum)
Amtek Auto Limited 60,000 200,000 Dec-06
Ahmednagar Forgings 46,000 100,000 Mar-07
Machining (m components)
Amtek Auto Limited 18 35 Dec-06

Restructuring of subsidiaries: It should be noted that during the past three years, Amtek has made a host of foreign acquisitions, namely Smith Jones Inc. (renamed as Amtek Gears), GWK Group (renamed as GWK Amtek) and Zelter Gmbh. Of the above, the restructuring plans for the first two companies are as follows.

Amtek Gears: The management expects topline to grow by 40% to 50% per annum for next two years as one of the competitors has filed for bankruptcy. Apart from this, it aims to improve operating margins from 5% to around 9% to 10% in the next two years.

GWK Amtek: The management does not intend to focus on topline. Rather, it is aiming at huge cost savings potential in the next two years. It plans to source around 80% of requirements of GWK from India over the next two years (currently around 30%). As per management, there are savings of around 35% out of which around 10% to 15% will be passed on and the balance reflected in profits. The management aims to raise operating margins to around 7% to 8% in the next two years, from the FY05 levels of 5.8%.

Domestic subsidiary and restructuring: Operating margins of the domestic subsidiary, Ahmednagar Forgings are significantly lower when compared to that of Amtek. This has been primarily due to the former’s high fixed costs and underutilisation of capacity. Things are, however, expected to improve from here on. This is because while the company’s capacity is being doubled at only 10% incremental fixed costs, utilisation levers are also likely to improve from FY05 levels of 45%. The management aims to bring the utilisation levels at par with that of the parent company in two years’ time.

Debt position: The debt position (in terms of debt to equity) of the company, post the conversion of FCCB, will come down from 1.2 times in FY05 to 0.1 times in FY06. The conversion price is Rs 209 per share. The company does not intend to borrow significantly in next two years. However, in case of a suitable acquisition opportunity, it may consider funding some part through external borrowings.

What to expect?
Seemingly, it appears that the company has drawn a sound strategy to optimize its overseas acquisitions and ensure optimum utilisation of its capacities. Similarly, almost entire capacity expansion plans are likely to be completed by FY07. While prospects appear to be good, we are in process of evaluating the company and accordingly would update our subscribers.

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