 "John Flintham")
On August 19, the management of Amtek Auto issued a "clarification" saying it was "not aware of any reasons" for the biggest single-day fall in the company's share price. The day before, Amtek's share price had tanked 37 per cent to Rs 80.75 on the National Stock Exchange after the exchange decided to remove the stock from the Futures and Options segment.
This development, which indicates a warning signal about the stock from the exchange, topped off a precipitous 46 per cent drop in the share price from Rs 150 on August 14 when the company announced a Rs 158-crore net loss for the first quarter of FY16 from Rs 86 crore profit in the same quarter a year ago.
In fact, the management's stated lack of awareness for Amtek's tanking stock price hardly rang true. By the end of the month, retail investors' awareness of this fast-growing New Delhi-headquartered automobile-component maker must have been high and for the wrong reasons. By then, JP Morgan had to announce a partial write-down in two of its schemes on account of a Rs 200-crore exposure to Amtek Auto debt papers.
The bad news came in a rush: CARE suspended Amtek's rating due to non-disclosure, Brickworks Ratings has downgraded its rating from A+ to C.
Yet, a little over a year ago, the Rs 15,454-crore Amtek Auto, the flagship of the Rs 20,000 crore group that includes a clutch of Indian and overseas manufacturing operations, was flying high. The brokerage Nomura had initiated a "buy" rating on the stock, then trading in the mid-200s with a target price of Rs 416. On Monday, the stock closed at Rs 51.90 at BSE.
Starting small
It was a high-risk call but not an unlikely one. For one, the company, which started out in 1987 as a small-scale manufacturer of connecting rod assemblies for Maruti Suzuki, had developed a reputation for sound management. "Amtek was one of our best suppliers," recalls Jagdish Khattar, former managing director of Maruti, "And if it had not been professionally managed it would not have reached its current position."
Today, Amtek counts almost every marque name in the Indian and global automobile industry as customers. Like the better known Bharat Forge, it is one of the world's largest players in casting, forging and machining with a global market share of 20 per cent in turbocharger housings and 15 per cent in ring gears.
For another, inorganic growth has paid off for the company in the past. By 2007, it had spent $90 million in acquiring some ten companies, five of them in the US and Europe. Arvind Dham, Amtek's founder and chairman, developed a reputation for turning around companies - such as US-based Smith Jones, by essentially arbitraging lower labour costs in India.
The 2008 global slowdown was also turned into an opportunity for more acquisitions, a strategy that made sense because asset valuations had become attractive. In June 2013, Amtek acquired Neumayer Tekfor, a Germany-based forging player; in August, it paid Rs 110 crore to pick up 51.3 per cent in JMT Auto, a Jamshedpur-based gear manufacturer. In March 2014, Amtek acquired Kuepper Group, a manufacturer of turbocharger housings for Euro 50 million.
After an 11-month gap, the company's acquisition spree gained momentum and it announced three buyouts in a span of three months. In March, it acquired Germany-based forgings maker and specialty steel trader Scholz Edelstahl; in April, the company announced its plan to acquire Japan-based Asahi Tec's iron casting, aluminium casting, forging and machining businesses that had a revenue of $375 million last year; in May, it announced its plan to acquire Germany-based Rege Holding, a component manufacturer.
Growing debt burden
Inevitably, these acquisitions, while adding to Amtek's topline, also led to an increase in its debt levels. Amtek's domestic business has a debt of Rs 12,000 crore, while overseas operations have a debt of Rs 3,200 crore. At the group level, debt, including those of its three companies - Metalyst Forgings, Castex Technologies and JMT Auto -, is Rs 20,000 crore.
If there was confidence about the group's ability to manage its debt and working capital in a low-growth market situation, it was because the management appeared to be on top of the problem. By FY13, according to a June 2014 analyst note from ICICI Securities, debt/EBITDA was high at 7x but it represented an improvement over the preceding two quarters. According to John Flintham, vice-chairman and managing director, it now stands at 5x and he expects it to be less than 3x.
Also, except for a drop in FY13, Amtek's consolidated net profit grew steadily through the slowdown years and its margins have been steady. This was because it focused on serving non-auto segments like tractors and construction equipment, the railways and the oil and gas industry, which currently accounts for 15 per cent of the group's turnover, and kept costs under control. Till last year, its net profit margins of 8.08 per cent were on a par with the best of its peers. By the quarter ended June, it was a negative 18.19 per cent.
Confidence in the company was in evidence as late as November 2014 when Amtek Global Technologies, the holding company for the group's international businesses, secured long-term finance of Rs 1,800 crore from Kohlberg Kravis Roberts & Co (KKR) to replace its existing bridge loan and consolidate all the company's existing debt. At the time, B V Krishnan, a managing director in KKR's India office, had said, "Dham has created a world-class and significantly scaled international auto components business, with a terrific management team."
To be sure, the promoters did react quickly to the August crisis by infusing Rs 75 crore into Amtek Auto as a signal of confidence, and announced that it planned to raise $1 billion by selling equity in its overseas businesses and some non-core businesses and industrial assets in India to tide over the cash flow problem but have not indicated what's on the block.
"We are obviously not going to sell cheap. We don't have to sell cheap. I believe there is enough interest," Flintham told Business Standard recently. "We have got working capital lines in place that are adequate for next 12 months," he added. He also sees green shoots of revival that should help. "The European, American and Japanese markets are doing well. I think we have seen the bottom in India," he said. Amtek gets half of its annual revenue from overseas.
Given Amtek's track record, nobody's writing it off yet. Apart from raising cash to repay debt, however, the management faces an enquiry from the market regulator following complaints from bond-holders of Castek, a subsidiary company, of price manipulation to trigger the conversion of a $200 million Foreign Currency Convertible Bond into equity.
All this could mean that Dham, son of a Haryana irrigation department officer and an architect by training, could face bigger challenges than ever before. On the Amtek website, the prompt for "Management team" is blank, with a small sign saying "under construction". That could be a good metaphor for the group right now.
