Amtek Auto: More miles to go

Price surge discounts expected operational gains & lower debt. Pace of improvement holds the key

Last week, the Amtek Auto stock rose sharply on expectations of robust growth in revenue and earnings, led by a recovery in the domestic automobile sector and the corporate capital expenditure cycle. In addition to the domestic market, analysts also expect the company to benefit from a spurt in revenue from recent foreign acquisitions and new orders.

Improving operating performance should help the company post earnings growth of 39 per cent during FY13-FY16, believe analysts at Nomura. While about 57 per cent of the revenue comes from the domestic market, with 61 per cent being accounted for by passenger cars, the company is likely to diversify its presence, both on the product and geographic fronts.

For the Street, a key worry has been the leverage, which has increased due to weak demand in the domestic and key markets, as well as acquisitions. In FY10, the company had net debt of Rs 200 crore, with a debt-to-equity ratio of 0.5; in FY13, net debt surged to about Rs 11,000 crore and net debt-to-equity ratio rose to 1.8. In June 2013, the company acquired Neumayer Tekfor and JMT Auto, and the Kuepper group in December 2013, at a total cost of about $270 million. Consequently, as of March-end this year, its net debt rose to Rs 15,303 crore, with a net debt-to-equity ratio of just under two.

The company’s management is focused on improving cash flows and return ratios and reducing debt. Through the next two financial years, the company plans to increase utilisation levels to 75-80 per cent from the current 55 per cent. It also intends to improve revenue from the current $2.5 billion to about $4 billion. Further, the ratio of net debt to earnings before interest, tax, depreciation and amortisation, which had peaked to 6.1 in the September 2013 quarter (currently 4.6), is likely to be reduced to 2.5.

The high debt led to the company stock languishing. Before the price surge on Friday, when the stock rose 20 per cent, as Nomura analysts upgraded it, Amtek Auto was trading at 4.5 times its FY15 estimated earnings of Rs 45.2. Analysts at Edelweiss Securities believe there is a strong case for re-rating if it is able to reduce debt and improve return ratios. While the stock is currently trading at Rs 265, as Nomura analysts have pegged an FY16 target price of Rs 416, there is an upside of 57 per cent. This sum-of-parts valuation factors in an improvement in the company’s debt position and the company turning free cash flow-positive in FY15, and improving thereafter.