Stock Review: AMTEK AUTO

Amtek Auto, one of the leading automobile forging players in the country, is well-placed to reap the benefits of strong demand in the domestic automotive market.

Given its global presence and a strong foothold in overseas automobile markets like the US and Europe, a gradual recovery in these markets will provide an upside in earnings in the coming quarters. Investors looking for a long-term growth story in the auto ancillary segment may consider the stock with a horizon of 2-3 years.

BUSINESS

It is the country's second largest auto forging company with auto and non-auto components business. Half of its revenue comes from domestic operations while the rest is from US and Europe.

The passenger car segment accounts for more than half of its business followed by light vehicles and the non-auto business. The latter includes components for locomotive forging of heavy earth moving vehicles. The company has a diversified client portfolio. No customer accounts for more than 15%, of revenues which reduces the risk of dependency.

GROWTH DRIVERS

A gradual recovery in its overseas business is expected to support Amtek Auto's performance in the coming quarters.

The company has also recently classified its forging and casting units under Amtek Auto to align the operations of its subsidiary. This restructuring will lead to better integration of operations and higher synergies, increasing cost efficiency and transparency of the business.

FINANCIALS

A slowdown in its international business adversely impacted the company's growth in the recent past. Its sales fell by 6% in the last three years when compounded annually. Net profit dropped by 13% during the period.

The company, however, reported a recovery in FY11 due to strong demand from the Indian market. During the March 2011 quarter, its sales grew by a sharp 35% to 461 crore while net profit rose by 47% to 62 crore. Its debt-equity ratio of 0.9 is marginally higher than its peer group.

VALUATIONS & CONCERNS

At the current market price of 169, the company is trading at price to earnings ratio (P/E) of 16, which is lower than the industry average P/E of 18. Considering Amtek's capacity expansion plan, and momentum in the domestic and global auto sectors, investors may take exposure to the stock with a long-term horizon.
The company's earnings may be impacted by slower-than-expected demand ramp-up in the European market. It derives close to one-third of its revenues from the overseas market, and any unfavorable currency fluctuations can hit net earnings.