Amtek Auto - Beaten down valuation offers value for long term - Networth

CMP : 72.50 (Potential upside 112%)

Incorporated in 1987, Amtek Auto Ltd (AAL) is one of the oldest and largest players in the auto-forging, casting, machining and sub-assembly space. AAL in the past shifted few overseas subsidiaries' manufacturing base in Europe and US to India, and gained thereby operational efficiencies. AAL's manufacturing base in India is spread across 16 locations across States. The Company, along with two other listed subsidiaries namely, Amtek India Ltd (61.64% stake) & Ahmednagar Forging Ltd (AFL) (54.96% stake) and other subsidiaries (see annexed Corporate Structure) constitute an auto-ancillary conglomerate in the Indian market. To reduce the cyclicality in the auto-sector, AAL has added products in the non-auto segments to cater to the emerging needs in critical infrastructure sectors. All the plants are world-standard complying with the specifications of global OEMs. It has forged JVs and partnership with leading technological partners from developed markets, to stay in sync with the evolving market. Having, consolidated its business, we believe, AAL is poised to capture big opportunities that could materialize from economic recovery expected from 1HFY14e.

- Margin leader in the auto-ancillary sector: AAL boasts of highest operating margin in the sector even in turbulent times, the Company could manage to hold its margins, even as peers lose sizable margins.

- Leader in multiple product categories; Low Client Concentration Risk: AAL scaled up its business to emerge as one of the leading auto-forging and machining player catering to nearly all the major OEM automotive names cutting across all segments (HCV, MCV, LCV, 2W, Material Handling equipment etc) not only in India but overseas markets as well. Today, no customer contributes more than 16% of the group sales, which substantially reduces client concentration risk. AAL possess leadership status across multiple product categories, which is testimonial to the kind of enduring business relationships it has nurtured over years. Top 5 clients as on 31 Mar are Ford, Honda Group, JCB, Maruti and Tata JLR.

- High entry barrier business model: Establishing world-class plants conforming to global standards and catering to the growing needs of OEM players at global scale is involving and very time consuming process, which cannot be easily replicated in short notice. Further, the global OEMs to compete internationally see low cost manufacturing base like India as attractive destination. Hence, days ahead AAL's already entrenched position in the market is set to further reinforce with association with more OEMs from international markets. AAL's six-sigma and lean technologies would continue to provide better value proposition to its clients. Its technological associations with leading global companies would too place it in forefront.

- Diversifying into related field to wane cyclical risk w.r.t auto sector: AAL has diversified into non-auto segments, in the realm of its core operations to cater to the Railway Wagons (high capacity new designs), High Precision Locomotive Components, Construction and Earth-moving equipments, Tractors, Specialty Vehicles and Aerospace components. Non-auto segment currently constitutes 22% of the turnover, is expected to grow to 28% in FY14e.

- Growth strategy: AAL has growth strategy incorporating factors like.1) Enhancing customer base, 2) Limited Capex with focus on cash generation, 3) Improving return ratios (RoE and RoCE), 4) Debt Reduction, 5) Focus on improving operational productivity across its facilities globally

- There is no major FCCB overhang: In the past to pursue organic and inorganic growth strategies, AAL had issued GDRs, Preferential Warrants, FCCBs (in 2 tranches) (See annexed "Capital Raising History"). Barring 4% of the 5.625% FCCB capital ($6.87-mn of $165-mn), which is pending conversion in July 2014 @Rs148.40 / FCCB, as on date no pending dilutive issue is existing.

Valuation: The stock, part of the respectable club of CNX-200, CNX-500, CNXAuto and BSE-200, has since Feb'12 been on a correction course despite strong fundamentals, which we believe is an aberration waiting to be corrected sooner or later. Slowdown in global auto demand in recent times could also be attributable to tempered sentiment. Leading institutional investors reposing faith in the performance of the Company, is a point, we believe, testimony to better future lying ahead. Presently, the stock is at rock-bottom (~4-year low), and is available at throw-away valuations, which can rarely be seen of the Company's stature. We infer that, investor-friendly measures like, proper communication between the management and the market participants along with prompt publication of financial results could go a long way in improving the shattered sentiment. We set a 1-year target price of Rs154 based on average valuation of consolidated entity (PEM) and Standalone entity (derived through SOTP valuation).

Source : Equity Bulls

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