March 24, 2015

Analysis: Amtek India Limited

www.drvijaymalik.com has a dedicated section for investment & stock specific queries of readers: “Ask Your Queries”. Overtime, readers have asked queries about multiple stocks in this section. Answers to these queries, have been done post preliminary analysis of the stocks under consideration. Such analysis has been found helpful by readers.

Q&A Series is an attempt to summarize & share with all the readers, the key questions and their answers, which have featured on “Ask Your Queries” section. Primary aim of this new feature is to share the knowledge with all the readers of the website.

The current section of this series: “Q&A” covers stocks: Amtek India Limited


Amtek India Limited

 


Q: Hi Vijay,

Please share your views on Amtek India Limited. With the current share price at a multi-year low (Rs. 46.5), it is trading at 0.51 times its book value. The Company has had consistent profit growth of over 30% in the last 5 years. The promoter holding has also increased. I do not understand why the share price has been battered over past months.

Is this a good pick for a long-term investor?



A: Thanks for writing to me!

Share price of any company may be reflecting many things, which might be related or completely unrelated to the company. Therefore, I would not comment on the stock price movement of Amtek India Limited. However, I would try to analyse the business dynamics of Amtek India Limited and recent developments:

Amtek India Limited equity analysis research report


Sales Growth with Maintained Profitability Margins: 

 

Amtek India Limited has witnessed good growth rate of 20-25% over last decade (2005-14). The growth is healthy, as Amtek India Limited has not compromised on profitability margins in its quest to chase higher sales targets. Operating profit margins are stable at 28-30% and net profit margins are stable at 8-9%.

Tax Rates: 

 

Amtek India Limited has been paying tax at a consistent rate of 30-32%, which is almost equal to corporate tax rate in India. It is a good sign.

Timely Conversion of Profits into Cash:

 

Amtek India Limited has been able to convert its profits into cash, as its cumulative cash from operations (CFO) over 10 years (2005-14) is INR 2,569 cr. against cumulative profit after tax (PAT) of INR 1,430 cr. Receivables days have improved from 71 days in FY2011 to 65 days in FY2014. This is another good sign as the profits are not being stuck in working capital/bad receivables accounts.


Poor Operating Efficiency:

 

When we try to see the operating efficiency of Amtek India Limited, we come to see the problems the company faces. Its asset turnover is very low, or I should say poor!! Its asset turnover is 0.5, which indicates that for every INR 1 increase in sales, it needs to put INR 2 in its fixed assets.

This can be visualized from the comparison of net fixed assets and sales of Amtek India Limited. In FY2014, it required assets of about INR 5,500 cr. to generate sales of about INR 3,000 cr. An investor can easily assume how much more money Amtek India Limited would need to keep on investing in its assets to generate future business growth. It is a very capital-intensive business.

Let us analyse Amtek India Limited from another perspective. In FY2014, Amtek India Limited, earned profit before tax of INR 361 cr. from assets of INR 5,500 cr. This is a pretax yield of 6.5%. If someone invests INR 5,500 cr. in a bank fixed deposit (FD) and then given current FD interest rates of 9-10%, she can easily earn about INR 500-550 cr. pretax, without doing anything. Why take the pain of running a huge company!

Anyway, keeping the comparison of investing in FD versus running a company, Amtek India Limited needs to deploy huge amount of capital to generate its revenues. As we saw that its operating profits are not sufficient to satisfy its cash guzzling huge investment requirements due to low asset turnover, it needs to find other sources of cash. Like most companies, Amtek India Limited seems to have relied on debt to fund its cash requirements

Increasing Debt Levels:

 

Debt of Amtek India Limited has increased from INR 156 cr. in FY2005 to INR 5,186 cr. in FY2014. A 33 times increase in debt..!! During the same period, its sales grew from INR 347 cr. (FY2005) to INR 2,991 cr. (FY2014). An increase of only 8 times in sales. This is an example of very poor operating efficiency. We can clearly see what impact a low asset turnover can have on any company. No wonder Amtek India Limited has eroded shareholder’s wealth during this period (2005-14).

This high debt level is going to put the company in deeper issues in case Amtek India Limited is not able to sustain its growth levels, which in turn would require further investment in assets. This would need more cash for which Amtek India Limited might need to rely on more debt. It seems that unless Amtek India Limited improves its assets utilization efficiency, it might land up in debt trap, which would be detrimental for its shareholders.

Erosion of Shareholder’s Wealth:

 

During last decade (2005-14), Amtek India Limited retained profits of INR 1,397 cr. however; its market capitalization increased by only INR 951 cr. during the same period. It indicates that wealth of only INR 0.68 was generated for every INR 1 retained by the company. This is not a desired characteristic of any investment.

Read: 3 Simple Ways to assess the Margin of Safety in a Stock

Acquisition of Kuepper group of Germany:

 

Last year Amtek India Limited acquired Kuepper, a German auto component maker. Acquisitions are always filled with challenges of integration and more often than not, acquisitions fail and thus turn out to be wealth destroyer for shareholders. It remains to be seen how well Amtek India Limited is able to integrate Kuepper into its ambit and gain some synergies, if any. 

If Amtek India Limited has acquired Kuepper for new technology to improve its operating efficiency and it is able to use it successfully, then Amtek India Limited  may see a new phase and might lead to re-rating of its stock. However, if it turns out to be another story of expensive acquisition gone wrong, then ultimately shareholders of Amtek India Limited will suffer.

These are my views about Amtek India Limited. However, you should do your own analysis before you take any investment related decision about Amtek India Limited.

You may use the following steps to analyse the company: "How to do Detailed Analysis of a Company"

Hope it helps!

Regards,


P.S:
  • To know about the stocks in my portfolio, their relative composition, cost price, details of all our buy/sell transactions since July 30, 2017 as well as to get updates about any future buy/sell transaction in my portfolio, you may subscribe to the premium service:  Follow My Portfolio with Latest Buy/Sell Transactions Updates (Premium Service)
  • The financial table in the above analysis has been prepared by using my customized stock analysis excel template which is now compatible with screener.in. This customized Excel template is now available for download as a premium feature. For further details and download: Click Here
  • You may learn more about our stock analysis approach in the e-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing”
  • You may read more company analyses based on our stock investing approach in the "Company Analyses" e-book series, which is spread across multiple volumes: Click Here
  • I have used the financial data provided by screener.in while conducting analysis for this article.





DISCLAIMER

 


The views and opinions expressed or implied herein are my own and do not reflect those of my employer, who shall not be liable for any action that may result as a consequence of my views and opinions.

Registration Status with SEBI:


I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013, since May 25, 2016.

Details of Financial Interest in the Subject Company:


Currently, I do not own stocks of any of the companies discussed above.