Amtek Auto: Forging ahead

UK buy to scale up the aluminium foundry business

India's second largest forgings player, Amtek Auto, has just acquired the UK-based JL French Withams aluminium foundry assets for $35 million. At 0.6 times sales, the deal is not expensive even though the company makes a net profit of less than a $1 million on revenues of $60 million.

Amtek, which already supplies to marquee clients such as Ford, BMW, Hyundai, Skania, Land Rover and Cummins should be able to use the new capacity to grow its business with these customers.

Like it has done with previous acquisitions, this time too the Rs 2,645-crore (FY06 revenues) components maker proposes to relocate Withams 18 production lines, which include a machining facility to India. The idea, of course, is to take advantage of the difference in costs, particularly labour costs, which would be lower by about 30-35 per cent.

Besides, this additional capacity of 20,000 tonne a year together with Amtek's existing capacity of 20,000 tonne a year will give the aluminium foundry business better economies of scale.

The management believes that over three to four years after production has stabilised, profits from this facility could be as much as $9-10 million. Amtek has raised $250 million through an FCCB last year and will use that to fund the deal.

The management believes that the company's exports, which are currently at $120 million, can go up to $250-300 million with foreign vendors resorting to more outsourcing.

The Amtek group has made several acquisitions in the past, including Amtek Autos GWK group purchase in the UK. The company's sales are expected to grow at around 40 per cent, compounded over the next three years to about Rs 5,700 crore by FY09.

Revenues for FY07 are estimated at around Rs 4000 crore, while operating profit is expected to be around Rs 750 crore, resulting in an operating margin of 18.6 per cent. Margins should improve with the benefit of scale. At the current price of Rs 417, the stock trades at 13 times consolidated estimated FY08 earnings and is not too expensive.

Gokaldas Exports: Better margins

The March 2007 quarter was quite good for garment exporter Gokaldas Exports as standalone sales improved 15.7 per cent y-o-y on the back of higher realisations, while operating profit was up 33 per cent. The growth in operating profit was owing to 600 basis point decline in raw materials as a percentage of sales.

The management clarified that raw material has not become cheaper, but this savings came from a change in product mix. The operating margin improved by 175 basis points y-o-y to 13.3 per cent in Q4, boosted by a doubling in duty drawback.

Gokaldas added five factories in FY07 at a cost of Rs 100 crore, three of which were commissioned in Q4, and its capacity went up 25 per cent to 30 million garments.

To mitigate the impact of dollar depreciation, the company covers a part of its revenues in the forward market. Its import content is around 35 per cent of revenues, which provides an automatic hedge. For FY07, its consolidated sales grew 16.4 per cent, and margins stood at 12 per cent.

Going forward, the rupee appreciation will be a concern, especially when currencies from neighbouring countries, which are also garment exporters, have depreciated. While manufacturers such as Gokaldas are strong on design, there will be some pressure on operating margin on account of this factor.

The operating margin is likely to contract by around 25 basis points in FY08, say analysts. The Gokaldas stock has been lost a third of its value in the past six months along with the decline of the dollar. The stock trades at 9-10 times estimated FY08 earnings, which is not expensive.

NTPC: Provisioning blues

NTPC was able to sell enhanced units of power on a y-o-y basis in the March 2007 quarter, but its operating margins were under pressure due to several one off-items such as provisioning for higher wages for its employees and waiving off interest on bonds in FY07. As a result, its operating profit grew 7.2 per cent y-o-y to Rs 2,339.7 crore in Q4 FY07, while its net sales rose 14.8 per cent to Rs 8,860.3 crore.

Operating profit margin also fell 185 basis points y-o-y to 26.4 per cent in the last quarter. NTPC sold 48.6 billion units in the last quarter, a growth of 10 per cent y-o-y, with its power plants reporting improved efficiencies, thanks to enhanced natural gas availability.

Realisations were estimated at Rs 1.82 per unit, a rise of 5.8 per cent in the last quarter. Higher realisations per unit in the March 2007 quarter are also owing to the passing on of higher fuel costs to customers.

NTPC had made a provision of Rs 97.9 crore in Q4 FY07, relating to higher salaries for employees in that quarter and it put pressure on margins.

For FY07, consolidated operating margin grew 440 basis points y-o-y to 30 per cent in the last quarter. The company's capacity at the end of May 2007 was 27,904 MW and it is expected to add 2,500 MW of additional capacity during FY08.

The stock has been an outperformer over the past three months. At Rs 159.5, it trades at 16.5 times estimated FY08 earnings leaving little room for further upsides.

With contributions from Shobhana Subramanian and Amriteshwar Mathur