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Amtek Auto: Beyond expectations!

May 5, 2006

Performance summary
Amtek Auto announced its 3QFY06 (June ending) results last week wherein it reported a robust 42% YoY growth in topline. The operating profits grew at a much faster pace of 92% YoY, primarily on account of a significant reduction in raw material costs (as a percentage of sales) leading to a sharp increase in operating margins. However, an increase in tax outgo restricted the bottomline growth to 68% YoY. On a consolidated basis, the topline grew by 55% YoY and the bottomline growth was 86% YoY.

Standalone performance
(Rs m) 3QFY05 3QFY06 Change 9MFY05 9MFY06 Change
Net sales 1,632 2,314 41.8% 4,831 6,557 35.7%
Expenditure 1,249 1,580 26.5% 3,705 4,539 22.5%
Operating profit (EBDITA) 383 735 92.1% 1,126 2,018 79.2%
EBDITA margin (%) 23.4% 31.7%   23.3% 30.8%  
Other income 78 46 -41.5% 110 142 29.5%
Interest 31 43 41.4% 93 148 59.9%
Depreciation 104 131 25.5% 272 385 41.7%
Profit before tax 326 606 86.1% 872 1,627 86.7%
Tax 63 164 159.7% 191 440 130.2%
Profit after tax/(loss) 262 442 68.4% 680 1,187 74.4%
Net profit margin (%) 16.1% 19.1%   14.1% 18.1%  
No. of shares (m) 120 120   120 120  
Diluted earnings per share (Rs)*         12.1  
Price to earnings ratio (x)*         29.2  
(*on a trailing twelve month basis)            

What is the company’s business?
Amtek Auto Limited (incorporated in 1985) is engaged in manufacturing of forged auto components (mainly for engine transmission and suspension systems). It is the second largest forging company in the country with a combined installed capacity (domestic) of 106,000 tons per annum. In the domestic automotive market, it is a Tier-1 supplier to almost all the leading original equipment manufacturers (OEMs).

What has driven performance in 3QFY06?
Topline – acquisition benefits: The topline growth of 42% YoY should be viewed in light of the increasing business from its foreign subsidiaries, which the company acquired over the last few years. The two important rationales behind the acquisitions were to acquire technology and also increase outsourcing work of the foreign companies. Currently, the company is meeting around 15% to 20% of requirements of its foreign subsidiaries. The company aims to take this to 80% in the next two to three years. Apart from this, the company has been also doing well in the domestic market.

Operating margins – raw material benefits: Operating margins expanded by 830 basis points (8.3%) in the current quarter, largely due to a 7.5% reduction (as % of sales) in raw material costs. This is partly due to weakening of steel cycle (a key raw material) and also due to increasing share of value-add work. Apart from this, there is a possibility that the company would have operated at higher capacity utilisation.

Cost break-up…
(Rs m) 3QFY05 3QFY06 %Change 9MFY05 9MFY06 %Change
Raw materials 1,045 1,310 25.3% 3,140 3,801 21.0%
% sales 64.1% 56.6%   65.0% 58.0%  
Staff cost 83 114 36.8% 229 307 34.1%
% sales 5.1% 4.9%   4.7% 4.7%  
Other expenses 121 156 29.3% 335 431 28.6%
% sales 7.4% 6.7%   6.9% 6.6%  

Bottomline – the tax axe: Fall in other income and rise in interest and depreciation charges affected the bottomline growth of the company during the quarter. It should be noted that in April 2005, the company had raised FCCBs worth US$ 150 m. Until 3QFY06, around 40% of the shares have been converted in equity shares. The company has to pay interest on the outstanding FCCB. However, higher effective tax rate (19% in 3QFY05 to 27% in 3QFY06) was the key contributor to the curtailment of bottomline growth during the quarter. Assuming a tax rate similar to the corresponding quarter previous year, the bottomline would have grown by 86% YoY.

Consolidated performance – A brief
Apart from the standalone performance, the company has delivered an impressive performance on the consolidated front also. While the data on the performance of different subsidiaries (except for Ahmednagar Forgings) is not available, a robust consolidated performance indicates that the restructuring activities in the subsidiaries (domestic as well as foreign) appear to be taking place.

Financial snapshot
(Rs m) 3QFY05 3QFY06 Change 9MFY05 9MFY06 Change
Net sales 4,815 7,466 55.1% 13,773 20,547 49.2%
Operating profit (EBDITA) 778 1,389 0.78512 2,191 3,778 72.4%
EBDITA margin (%) 16.2% 18.6% 0.0% 15.9% 18.4%  
Profit after tax/(loss) 417 774 85.5% 1,162 2,057 77.1%
Net profit margin (%) 8.7% 10.4%   8.4% 10.0%  
Minority Interest (MI) 34 76   100 189  
Net Profit after MI 384 698 81.8% 1,062 1,868 75.9%
Diluted earnings per share (Rs)*         18.9  
Price to earnings ratio (x)*         18.6  
(*on a trailing twelve month basis)            

Over the last four quarters
As can be seen from the chart below, over the last few quarters, the company has not only benefited from the weakening steel cycle but has also improved its internal efficiencies, as is evident from the improving margins. However, going forward, we believe these margins are not sustainable. Having said that, with improving product mix (i.e. higher value add products) and optimum capacity utilisation, we expect margins to stabilise in the range of 28% to 29% in the next two years.

What to expect?
At Rs 353, the stock is trading at a price to earnings multiple of 12.1 times our estimated consolidated FY08 earnings.

The performance of the company on the standalone basis is in line with our estimates except for operating margins (and the consequential improvement in net profits). Hence to that extent the company has out performed our estimates.

On a consolidated basis, while the operating margins and net margins are in line with our estimates, the company has outperformed our topline projections. Currently, as there is not much information available relating to the performance of Amtek’s subsidiaries, we would not revisit our consolidated projections till there is availability of sufficient information. However, at the current juncture, we maintain our view on the stock.

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