Amtek Auto: Upside drag potential

Amtek Auto is riding high on acquisitions

Amtek Auto has completed a GDR issue in what is possibly the best time it could ever tap the equity market. Amtek's shares currently trade at an all-time high of Rs 182, up around 370 per cent since they started rallying last year.

The GDR issue, worth $69 million including the greenshoe option, was oversubscribed almost two times, indicating that demand for Amtek Auto's stock continues to be high.

Amtek has attracted significant FII interest-FIIs held less than 5 per cent of the company's equity back in September 2003, which has now jumped to almost 30 per cent.

The reason investors are flocking the Amtek counter is that it has developed a knack for acquiring auto component companies cheap and turning them around.

Amtek Auto along with its group companies have made six acquisitions in the past two years. Five of these were foreign acquisitions, with an intention to leverage the acquired company's relationships with existing clients and create an outsourcing opportunity for Amtek.

A case in point is the UK-based company, Geo-W-King (GWK), which has an impressive client list in Ford, Jaguar, Land Rover, GM and BMW (among others). Amtek, which traditionally has had a low export base, would clearly benefit from an exposure to the export markets.

Besides, it also plans to transfer some of GWK's work to India, given its cost advantage. This, in turn, would make GWK more cost competitive and is expected to result in more orders for the company.

Given its success thus far with the growth-through-acquisition model, Amtek plans to continue looking at acquisition opportunities. That's the reason for the $69 million GDR issue, close on the heels of a $60 million foreign loan taken in September.

But acquisitions needn't always be rosy affairs - there can be integration issues - and given the dramatic rise in the stock already, further upside, if any, would be restricted.

Dollar decline and India

The dollar's global slide, which led to a new low against the euro on Wednesday, is likely to prove a blessing for India. Almost everybody seems to be bearish on the dollar, given the huge US current account deficit and the perception that the US administration will use dollar devaluation as a way to correct the imbalances.

A weaker dollar has already been the impetus behind the record flows into emerging markets this month-not only into emerging market equities but also into emerging market bonds.

The flood of money, easily seen from the FII figures, has led to the surge in stock prices, and there's no reason why prices should decline so long as liquidity remains so good.

Secondly, the inflow into emerging market bonds has been the incentive for Indian corporates rushing to tap the bond markets overseas. They are thus able to raise funds cheaply, helping fund expansion at home.

Next, the rise in the rupee has already led to RBI intervention in the currency markets, where it buys dollars, releasing rupees.

The rupees add to liquidity in the money market, preventing yields from rising and therefore lowering the upward pressure on interest rates. And to the extent that the RBI allows the rupee to appreciate, imported inflationary pressures subside, also keeping bond yields under check.

Conventional wisdom suggests that a weaker dollar will hurt exporters. That may not happen in the IT sector, however, where the strength of the outsourcing story could lead to volume gains offsetting any losses on account of lower rupee realisations.

A weaker dollar will boost US exports, which do not compete with Indian exports""it is Europe which will be the principal loser. In fact, an export boost for the US economy could also help Indian exports to that country.

Selling pressure on mutual funds

FII inflows have touched record highs, the markets are on a roll, but domestic mutual funds continue to sell equities. A glance at the monthly numbers for this fiscal show that apart from May, sales have exceeded purchases in every month.

Redemptions have been one reason fund managers were forced to sell even when they didn't want to. Money has flown out of funds and into IPOs such as NTPC and TCS.

With investor-friendly changes in the short and long-term capital gains, post the budget in July, some money has also found its way into stocks- the rally in mid-caps bears testimony to that.

Besides, few big institutional players, which had parked fairly large amounts in equity schemes in February and March, have been gradually booking profit. According to mutual fund sources, this accounts for about 10 per cent of the outflows.

Interestingly net sales have been highest in November at Rs 530 crore. This selling has apparently been prompted by nervousness on the part of both investors and fund managers, with the Sensex now at the 6000 levels.

In fact, several domestic funds have been wary since the fundamentals did not justify the high valuations in the market, especially in the case of mid-cap stocks.

Although FIIs continue to buy into the market, fund managers seem to think that it could be time to book some profits and re-enter at lower levels.

With contributions by Mobis Philipose and Shobhana Subramanian