Amtek Auto: Gaining size, higher profits to follow?

Acquisitions have helped group triple revenue over 3 years

The company recently announced the completion of its acquisition of Japan-based Asahi Tec's iron casting, aluminium casting, forging and machining businesses. The business had year-ended revenues of $375 million. The acquisition is expected to be complementary to group companies (Ahmednagar Forgings/Amtek India), giving both access to the acquired entity's technologies. In addition to supply chain integration, the acquisition will also give the group new customers.

The other acquisition by the company was that of Germany-based REGE Holding. This (expected to be completed by August) will help improve the utilisations of the group's India-based entities from the current 50-53 per cent. There could be gains of $50-100 million in revenues for Amtek, as well as improvement in margins over the next year and a half.

On the spate of acquisitions over recent years, including two this year and the higher debt on its book, the company has indicated all acquisitions have been balance sheet-accretive and it has been able to improve the operating performance of the acquired entities.

The margins of Neumayer Tekfor, for example, acquired a couple of years ago have increased from 6.5 per cent to 11-12 per cent. Due to the acquisitions, debt has increased from Rs 13,287 crore in FY13 to Rs 16,507 crore as of September 2014, leading to a rise in net debt to equity from 1.65 times to 1.83 times. The company is expected to keep it under two. It has, however, been able to bring down the ratio of net debt to operating earnings from 5.3 times in FY13 to just under 4.5 times currently. The company has a target of bringing this down to 3-3.25 times.

On demand, the company is expecting passenger vehicle growth in Europe to be steady to growing. This will be important, as Europe contributes the largest chunk of international revenues. Revenue from outside India constitutes 50-70 per cent on a standalone and consolidated basis. The company has new orders worth Rs 10,000 crore to be implemented over seven years, starting in the next 18 months.

Amtek Auto is looking to increase the return ratios on the back of higher utilisation, and internal cash flows from the current 10-11 per cent to the mid to high teens over the next two to three years. While the company has grown its revenues from $1.2 billion in 2012 to $3.8 billion currently through acquisitions and is well placed across the value chain, regions, and product categories, how much of this translates into higher profitability and profits would be key if the stock is to be re-rated.