This article provides a fundamental analysis of Castex Technologies Ltd (erstwhile Amtek India Ltd), a manufacturer of iron cast automotive components in India.
In order to benefit the maximum from this article, an investor should focus more on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc used to get the information. This will help her in improving her stock analysis skills.
Castex Technologies Ltd (Amtek India Ltd) Research Report by Reader
Q: Hi Vijay,
Please share your views on Amtek India Ltd. 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 the past months.
Is this a good pick for a long-term investor?
Dr Vijay Malik’s Response
Thanks for writing to me!
The 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 Ltd. However, I would try to analyse the business dynamics of Amtek India Ltd and recent developments:
Financial Analysis of Castex Technologies Ltd / Amtek India Ltd:
Amtek India Ltd has witnessed a good growth rate of 20-25% over the last decade (2005-14). The growth is healthy, as the company 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%.
Advised reading: How to do Business Analysis of Auto Ancillary Companies
Amtek India Ltd has been paying tax at a consistent rate of 30-32%, which is almost equal to the corporate tax rate in India. It is a good sign.
Timely Conversion of Profits into Cash:
Castex Technologies Ltd 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.
Operating Efficiency Analysis of Castex Technologies Ltd / Amtek India Ltd:
When we try to see the operating efficiency of Amtek India Ltd, 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 Castex Technologies Ltd. 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 Castex Technologies Ltd would need to keep on investing in its assets to generate future business growth. It is a very capital-intensive business.
Advised reading: Asset Turnover Ratio: A Complete Guide for Investors
Let us analyse Amtek India Ltd from another perspective. In FY2014, Amtek India Ltd, 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!
Further advised reading: When a company should sell all assets and invest money in FDs?
You may read about some of the other companies, which have such low returns on their assets that the company might be better off selling all its assets and investing the money in bank fixed deposits:
- Analysis: Globus Spirits Ltd
- Analysis: Meghmani Organics Ltd
- Analysis: Navkar Corporation Ltd
- Analysis: KNR Constructions Ltd: Some road assets are earning toll income, which is much less than the interest income that the company would have earned by putting the cost of building the road in a fixed deposit.
Anyway, keeping the comparison of investing in FD versus running a company, Amtek India Ltd needs to deploy a 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 Ltd seems to have relied on debt to fund its cash requirements.
Increasing Debt Levels of Castex Technologies Ltd / Amtek India Ltd
The debt of Amtek India Ltd 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 Castex Technologies Ltd 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 Castex Technologies Ltd 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 Ltd might need to rely on more debt. It seems that unless Castex Technologies Ltd improves its assets utilization efficiency, it might land up in a debt trap, which would be detrimental for its shareholders.
Erosion of Shareholder’s Wealth:
During the last decade (2005-14), Amtek India Ltd retained profits of INR 1,397 cr. however; its market capitalization increased by only INR 951 cr. during the same period. It indicates that a 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.
Acquisition of Kuepper group of Germany:
Last year Amtek India Ltd 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 Ltd is able to integrate Kuepper into its ambit and gain some synergies if any.
If Castex Technologies Ltd has acquired Kuepper for new technology to improve its operating efficiency and it is able to use it successfully, then Castex Technologies Ltd may see a new phase and might lead to re-rating of its stock. However, if it turns out to be another story of an expensive acquisition gone wrong, then ultimately shareholders of Amtek India Ltd will suffer.
These are my views about Amtek India Ltd. However, you should do your own analysis before you take any investment-related decision about Amtek India Ltd.
You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
Hope it helps!
Readers’ Queries about Amtek India Ltd
You were spot on about Amtek India Limited.
Now the stock is coming down almost daily due to the huge debt on their books.
Thanks for writing to me! I am happy that you found the article useful.
The issues in the business model of Amtek along with the problems of debt servicing were apparent during the financial analysis.
However, the exact trigger point for share price decline cannot be predicted. Neither it can be said with certainty that share price will not rise/stay sideways in future.
However, over long periods of time, share prices of companies with the strong business model, lots of free cash generation tend to go up and generate wealth for shareholders.
You may read the following article to find companies with good fundamentals:
Hats off to you Dr Stock. You found loopholes in Amtek India Limited very early and now the market is realizing this now.
Thanks for writing to me! I am happy that you found the article useful.
I merely provided my interpretation of the financial numbers of Amtek India.
I believe that if a framework approach is followed as described in the article series: “Selecting Top Stocks to Buy”, then any investor can differentiate between fundamentally sound companies from weaker ones.
All the best for your investing journey!
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Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.