To Do:

 Give a brief about the Auto Ancillary Industry (Parv)

 About Amtek (Tarushi)
 Business Risk
a. Systematic Risk (Harsh)
b. Unsystematic Risk (Vedu)
 Financial Risk (Harsh & Vedu)
 Steps taken by the company to overcome the situation (Consider their Balance
sheets and see if they done) (Harsh & Vedu)
 About their present position (Tarushi and Parv look for information)
 Options (Will discuss)
 Recommendations (Will discuss)

AUTO ANCILLARY INDUSTRY IN INDIA

The auto ancillary industry is growing in tandem with the country’s rapid automobile industry
and is characterized by low manufacturing cost, high standard of quality and engineering
expenses. The industry is currently contributing around 2.3% of India’s GDP and provide
direct and indirect employment around 0.92 million people. The auto ancillary industry which
is known for the quality and productivity across the world, has proved to be a significant
contributor to the global auto mobile supply chain.

India now supplies high range of components to global auto makers, it includes Toyota, ford,
Hyundai, Honda, Volkswagen etc. Mainly the rapid expansion of domestic automotive
market is also a key driver for the auto components industry in India. Now the country is
manufacturing globally a small car hub, the several auto components have a strong base in
India and are now focusing on development and research activities.

The govt. has permitted 100% foreign equity investment, also the auto component sector
has expanded to grow strongly in the coming years.

AUTO ANCILLARY PRODUCT CLASSIFICATION

ENGIN SUSPENTIO ELECTRONI EQUIPMENT TRANSMISSIO OTHER

E N AND C PARTS S N AND S
PARTS BREAKING STEERING
PARTS PARTS
· ENIGINE PARTS- Mainly it includes full-injection system, pistons and pistons rings,
engine valves & parts and also the power train components.

· SUSPENTION AND BREAKING PARTS- Brake and brake assembly, shock absorbers
and also leaf spring

· ELECTRICAL PARTS- Spark plugs, flywheel magnetos, ignition system and other
equipment’s.

· EQUIPMENTS- Wiper motor, dashboard instruments, headlights and other panel

instruments.

· TRANSMISSION AND STERING PARTS- Wheels, gears, steering system and clutches.

· OTHERS- Body and chassis, pressure die casting, sheet metal parts and also the fan
belts.

INDUSTRY STRUCTURE OF AUTO ANCILLARY

· The Indian auto ancillary is divided with large and small players.
· While large players focus on high valued precision engineering products, the small
players focus on lower value- added products and aftermarket products.
· There are around 6400 companies of which around 600 large companies contribute to
around 77% of total production.
· The retail market has a sizeable presence of the small players including garages and gas
station.

About Amtek
Amtek Auto, one of the largest manufacturers of integrated automotive products in India has
strongly established itself globally. Its headquarter is in New Delhi. Being one of the world’s
largest integrated machining companies, the various operations of the company include -
forging, grey and ductile iron casting, gravity and high-pressure aluminum die casting and
machining and sub-assembly. The company has positioned itself not only in auto sectors but
also in non-auto sectors (railways) producing components like specialty vehicles, aerospace,
agricultural and heavy earth moving equipment.

The company’s pillars of CSR initiatives are Education, Health, Environment & vocational
empowerment. Amtek aspires to change the future by maintaining high quality standards.

Areas of Focus
 Enabling future generations to grow professionally by improving education
 Reduction in environmental impact from company’s operations
 Youth & Women empowerment to create high quality standards.

Corporate Governance at Amtek

Amtek’s objective of expanding and becoming globally competitive makes the company
adopt the ‘best practices’ being followed in Corporate Governance across the world. To
protect the stakeholders interest, emphasize is laid upon full transparency and accountability
in all the transactions. It is the responsibility of the board to safeguard the stakeholders’
interests and wealth. To Amtek, corporate governance is like a philosophy to be forged
ahead, a value to be acquired and an ideology to be deep-rooted into the corporate culture.
The company’s belief is to be to be better managed and governed and to identify the
activities of national interest. The corporate structure, business and disclosure practices is in
alignment with Corporate Governance Philosophy. The company promised to focus on good
corporate governance as it play an important role in sustainable corporate growth and long
term value creation.

Present position of Amtek Auto

Amtek Auto limited was facing bankruptcy proceedings over defaults worth Rs12,700cr, so
there was need to sell the company. Earlier bids for the company were below the liquidation
value of the company, therefore, the panels of lenders rejected to sell the company as a
standalone entity. There was a view to sell AAL’s subsidiaries along the company. There
were two bidders, US hedge fund Deccan Value and Liberty House but the offers from the
parties were rejected since they were unattractive and below the liquidation value of the
AAL. Hence, AAL group companies such as Castex Technologies Limited (CTL) and
Metalyst Forgings Limited (MFL) which were the listed entities were asked to be added in the
offer. CTL, as on March 31, 2017 had revenues of Rs1,471cr, Net Loss of Rs1,081 cr and
total debt of Rs6,285 cr whereas MFL had standalone revenues of Rs1,106cr in and Net
Loss of Rs650cr. The percentage owned by AAL in CTL and MFL was 30.59% and 57.19%
respectively.

Amtek Auto Limited expertise in Forging, Grey and Ductile Iron Casting, Gravity and high-
pressure Aluminium Die Casting and Machining and Sub-Assembly. CTL produce
components produced for 2/3 wheelers, cars, tractors, light commercial vehicles (LCV),
heavy commercial vehicles (HCV) and stationary engines. Connecting rod assemblies,
cylinder blocks, flywheel assemblies and turbocharger housing where the categories of
components manufactured by CTL. MFL, the second largest manufacturer of forged
automotive components, cold forged parts and high tensile fasteners in India produced the
components for the vehicles same as of CTL but the components manufactured were
different. The categories of components manufactured are camshafts, connecting rods,
crankshafts, crown wheel, hub and shafts.

Liberty House which is known as the global supplier of metals and engineering solutions
emerges out to be the top bidder for Amtek Auto. This deal was the first big entry of Liberty
House into the India auto sector. The chairman of Liberty House stated that the main reason
behind acquiring AmteK Auto was to bring ‘green metal’ to India and to expand the business
in automotive sector across the world. The shares of Amtek Auto were locked at 5% upper
circuit at Rs. 23.80 after Liberty House emerges to be the highest bidder for the company.

Business Risk:
Business Risk refers to the ability of a business to make sufficient sales and generate
sufficient revenues so as to cover up its operational costs and derive profits. Under business
risks we take into consider various factors which affects the operations and functions of a
company such as market fluctuations, competition, demand for the products and services
that a company sells, Strategic Alliance and Corporate Acquisition etc. These factors can be
broadly divided under two categories: Systematic and Unsystematic risks.

Systematic Risk:
Under systematic risks we look into risks associated with any business enterprise, risks
resulting from economic, political and market conditions. These are those kind of risks over
which companies have usually little or no control.

In case of Amtek, if we look at the performance of the Auto Ancillary Industry, the industry for
the quarter ending June 2015 showed an increase in sales of 1.85% and a decline of
15.61%, this slight increase sales couldn’t stand against the hike in prices of raw materials.
Amtek’s condition was even worse, there sales went down by 18% and the operating income
was down by 87%. The Indian Auto Ancillary Industry was known for providing cheap skilled
labour which had a cost ranging between 3% to 12% of the total revenue as compared to US
which spent between 15% to 20% of their revenue on direct labor. Also, the geographical
location of India helped them to export products in key automotive markets such as Europe,
Middle East and Southeast Asia.

But the Indian industry still faced huge competition from China which provided similar
products at lesser price with higher efficiency and it was this reason that Indian Auto
Ancillary Industry, contributed only a bit to the Indian economy from its exports business.

If we look at Amtek within India only, they were once a major player which held almost
12.5% of total Indian Auto Ancillary Industry with major competition coming from MNCs and
Motherson Sumi group. But now after their fall in 2015, Amtek is left with only 0.2% market
share and Motherson Bhumi still leading with a market capitalization of 22%.

Since this sector contributes approximately 2% of Indian GDP, thus it enjoys various benefits
from the government as well. Recently, Government of India launched Automotive Mission
Plan (AMP) 2006–2016 under this the government focuses at increasing the contribution of
Automotive Industry to the country’s GDP from 10% to 13%. Also, the ‘Make in India’
movement which help attract companies to operate in India and thus they will be having our
auto component makers as their chief suppliers which will help them grow as well as giving
employment to a large number of workers. Even the GST taxation system helped these auto
components makers as they were getting there raw materials from different states and were
transporting the final products to different places which made them liable to varying taxation
systems. But with GST there came an end to multiple taxes.

With government switching from BS4 to BS6 by 2025 in order to meet its emission control
strategies, it is a huge challenge for this industry. This is because all these norms require
companies to use better technology, better engines and automotive components and thus
companies need to inject money to come up with required specifications. In case of Amtek,
we can see from their balance sheet (exhibit ) that they already have a lot of standing
liabilities and not that much shareholders’ funds which can be used for both paying out
dividends as well as for financing projects.

Unsystematic Risk
This risk is related to the specific areas of business where the organisation is into. In
the case of Amtek the organisation was into the business of automobiles. The
unsystematic risks however can be controlled by good management decisions on
parameters such as
1. Costs involved
2. Investments made
3. Cash flows
4. Expenses
When we look at the aspect of costs of amtek, we can find the following flaws in the
cost management.
The inventory loss recorded by Amtek was Rs 591 crores by june 2015. While
comparing this to their previous inventory losses, the amount is significantly higher,
they recorded a loss of only Rs 34 crores in the previous. Also looking into one
quarter of 2014-2015 the loss was Rs 252 crores against Rs 7 Crores in the same
quarter last year.
Looking into the expenses, the expenditure on raw materials increased by 35% to Rs
841 Crore in the June quarter. The expenditure on raw material consumed increased
by 37% to Rs 2415 crores. If there is increase in the expenses means that the net
sales should also have increased but the net sales showed a flat growth at Rs 2798
crore. At the same we also noticed that the prices of industrial commodities had
decreased which means that the above expenses should have decreased instead of
increasing.
When we look into the operating profit of amtek, at the end of june quarter the
operating profit decreased by 87% to Rs 30.7 Crores. After considering all the
finance cost and other charges the company saw a loss of 157.6 crores against a
profit of 86 crores in the same quarter last year. The operating profit for the quarter
slipped by 41% to Rs 400 crores.
Now when we look at the cash flows for the June 2015 quarter the industry’s Interest
coverage ratio went down from 3.27 to 1.89, whereas Amtek’s ICR went down to
0.13 from 2.41. This shows that Amtek was having shortage of cash flow to meet its
obligations to service its debts.

In the case of Amtek the unsystematic risk was high in investments as the
organisations had been making a number of acquisitions over the years. These all
acquisitions were made using debt finance and this lead to a lot of risk. The number
of acquisitions made from 2005-2014 was 22. All these acquisitions was done by
debt financing. So Amtek was finding it difficult to service these loans and this was
the foundation for the bigger problems to come.

FINANCIAL RISK
This is one of the major aspects to look into in the case of Amtek Auto. Financial
risks refers to a company’s ability to manage its debts and financial leverages. This
kind of risk suggests the company’s use of leverages and debt financing. Thus,
financial risks provide us with the sight of the company’s ability to make interest
payments on financing or meet other debt-related obligations. Higher the levels of
debt, higher the financial risk because there exists a greater possibility of insolvency
and the threat of company failing to meet its financial obligations.

To analyse the levels of financial risk in case of Amtek Auto we will consider the
changes in the levels of debts, equity, assets and interest expenses over the years.
It was in the quarter ending June 2015, Amtek reported a loss of Rs. 1.58 billions. If
we look at the total revenue for FY 2011 it was about Rs. 1960 crores and then it
went up to an increase by 104% for the FY 2014 and after that they witnesses a fall
in revenues by 127% to Rs. 1510 crores for FY 2016. The operating income shows
an even major decline of x% from ---- to --- showing poor performance of the
company. The possible reasons stated for these losses for FY 2014 by the company
were the effect of weak global conditions which could be compared with the
industry’s performance which showed a quarterly decline of 4% in March 2014. The
real picture is depicted when we begin to analyze the operating income.

The Profit before tax (PBT) has come down from a profit of Rs. 450 crores to a loss
of Rs. 1624 crores for the FY 2016-17. The fall came majorly in the year 2015 when
the PBT was down by 140% from a profit of Rs. 472 crores in September 2014 to a
loss of Rs. 187.22 crores. Now the question arises what were the major causes for
these losses? Well, if we consider the horizontal trends keeping year 2011 as the
base year, we don’t see much changes in the levels of revenue. It is the expenses
side of the P/L statement which is creating an impact.

The direct labor, direct materials costs and the total revenue show a quite similar
trend which is going up till september 2014 and then coming down significantly uptil
March 2016. The only cost that had been increasing since 2011 is the finance cost.
From Rs. 143.93 crores for June 2011 to Rs. 774.54 crores for September 2015
showing a 538% increase. This clearly indicates that the risk lies on the company’s
debt side.

Let's now look at the liabilities side of the balance sheet (exhibit ). In FY 2011, the
current and non-current liabilities accounted for Rs. 3700 crores and has been
increasing ever since to a total of Rs. 11081 crores in 2015 and Rs. 12,496 crores in
2017 thus showing an increase of approx. 300% and 337% respectively. Whereas
such increasing trends aren’t seen in the shareholders’ funds values. The
shareholders’ funds have stayed in the range of (+/- 5%) of the value in FY 2011.
This shows that the company has been utilizing the debts to finance its projects
instead of the equity. These figures put up a key worry for the company. The
leverage has been increasing due to weak demand in the domestic and key markets,
as well as acquisitions. Infact, in June 2013, the company acquired Neumayer
Tekfor and JMT Auto, and the Kuepper group in December 2013, at a total cost of
about $270 million. Consequently, we can study the above observations by
considering the variation in debt-to-equity (D/E) ratio over the years (exhibit ). The
D/E ratio has been increasing since 2011. The ratio was at 0.77 in June 2011 and
reached to a value of 1.82 by March 16 which suggests that the company might not
be able to generate enough cash flows to meet its debt obligations. This company
should have seen this coming, the failure here lies on the management side and
ultimately led to a financial risk. All this lead to an whopping growth in interest
expenses by 44.45% during the period between FY 2010 and FY 2014. The interest
coverage ratio has also been going down from 2.33 in September 2013 to -0.13 in
March 2017 which clearly makes the company questionable to meet its interest
expenses to the debtors.
Problems
After the analysis of the company’s Annual reports, News updates, we have come to
know the problems of Amtek Industries are as follows:-
1. High Inorganic Growth
Amtek Group in the period of 2012-2015 made all total of 21 acquisitions. In FY15 it
made 3 acquisitions that are Asahi Tec Corporation, a japanese company. Asahi’s
Iron and aluminum casting, forging and machining business were acquired by
Amtek. The annual revenue was USD 375 Million. It has facilities in Japan, Thailand
and a strategic holding in China.
The second acquisition for the year was Scholz Edelstahl GmbH of Germany. Scholz
is a high quality die forging manufacturer for both auto and non auto sector. The
annual turnover was around Euro 175 Million.
The final acquisition for the year was REGE Holding GmbH of Germany. This
company through its subsidiaries provided machining and assembly components.
The annual revenues were Euro 200 Million.
Though Amtek was acquiring the companies which had a good revenue. The
acquiring cost was totally funded by Debt financing. This leads to our second
problem.
2. Increase in Debt Burden
So the High Inorganic growth at Amtek led to increase in debt levels at a very high
rate. For the FY2012 the debt was around Rs 8,228 crores, but just in the FY2015
the debt level doubled to Rs 15,169 crore. As per a senior executive at Amtek the
debt was at Rs 22,828 crores. He also said that while acquiring companies at global
level they had to raise huge debts from the market. We can also see this by the debt
to equity ratio which increased to 2.42 in FY2014 from 1.44 in FY2012. Though they
said that they will decrease the debt by 1500 to 2000 crore, they did not have a
concrete strategy to reduce the debt.
3. Majority of Loan amount was declared as NPAs
The major issue of Amtek was its leverage levels. Amtek group had nearly Rs
14,100 crore worth of outstanding loan that had been declared as NPA (Non-
Performing Assets). Though the company tried to reduce some of the loan by
monetizing part of its assets. If we see the debt/EBIT ratio and do a peer comparison
we can see that Bharat Forge had a ratio of 2.2 whereas Amtek had a ratio over 7.5.
This was when Amtek was making profits. The Chairman was confident that its
global ventures can partially monetized to defray its loans. But at the same time the
US and European markets did not show that heavy demand to justify anyone to buy
these companies at premium valuations.
4. Weak Financial Results
Amtek reported a loss of Rs 344 crores in the FY2015, which just showed a profit of
Rs 472 crores in the previous financial year. Due to the continuous increase in debt
with matching substantial growth the company showed a decline in the profits. The
EPS for the financial year was a negative 5.24. The ICR ratio which is for the amount
of interest that a company can pay also decreased substantially from 2.1 in FY2014
to 0.56 in FY2015. The Dividend payout ratio dropped from 3.4 to 0 in just 1 year. All
the financias took a toll. This shows that the company was tumbling way to fast
down the road.
5. Exclusion of Amtek stock from derivatives section
SEBI announced in 2015 that Amtek Auto will be excluded from the derivatives
section with effect from October 30, 2015. This decision was taken because the
stock was in trading ban list for over 3 months. This happens when the stock crosses
the 95% of market wide limit. This lead to share prices tank by 39.3% to Rs 78
6. Question on the valuation of recent acquisitions
As said by investors the company did not enjoy the best of reputation among various
stakeholders. The recent acquisitions made by Amtek were being questioned on the
valuation of the companies.
7. Red Flags
The after effects of worsening financials was yet to come. CARE ratings revised its
rating for Amtek’s long term loans and non convertible debentures from AA to AA- in
the month of May. After further deterioration in companies financials, the CARE
ratings suspended Amtek’s ratings on August 31,2015. The liquidity crunch started
affecting its group entities which borrow money from AML.
The second red flag was when Joint Lenders Forum which consists of Bank of
Maharashtra, Bank of India, Andhra Bank and Karnataka Bank were examining the
case of delaying payments of Castex Technologies. When Amtek was questioned by
the stock exchanges regarding the delayed payments they said they were facing
some temporary cash flow mismatch.
The third red flag was SEBI’s investigations into alleged share price manipulation by
Castex Tech with role of banks, MF’s and rating agencies also coming under the
scanner. The alleged share price manipulation was done by forcible conversion of
foreign bonds.
The fourth red flag was the market rumour of Amtek being on the edge of the cliff of
a default on its huge debt payments. Amtek was classified as SMA-2 (Special
Mentions Account) which is whenever a company defaults on interest payment for
over 60 days.
Another red flag was that the Amtek Auto defaulted on Rs 800 crore Bond payment.
This exposed the Indian Banking system to a near of Rs 8000 cr of loans, which
have been on the verge of being classified as bad loans if the companies don’t make
their payments quickly. This Bond of Amtek was a 5 year bond which matured in
August 2015 and the company failed to pay. Amtek was again trying to secure a Rs
1000 cr Loan to repay the bond investors. Further destroying the situation was that
Amtek paid back to Aishwarya, David Dhawan which irked the banks.
From this we can see that Amtek was trying to get out debt flood but the situation
was pushing them deep into the floods and the company was failing one by one in all
ways.
8. Stock Price tumbling
The root of the whole show was when NSE declared the exclusion of Amtek from the
derivatives sector. This was the decision made on the basis of the poor performance
of Amtek in FY2015. Amtek’s share almost crashed 63% in 4 consecutive trading
sessions. The pain for Amtek did not end here, Amtek’s subsidiaries also took a
beating of 40% downfall in their share prices.
All this lead to Amtek’s liquidity crunch problems impacting its operations in a big
way.
Adding to their worries the company continued to deteriorate in terms of profit, with
recording a loss of Rs 528 cr for the quarter ending Mar 2016 and the present loss
recorded was Rs 889 cr for the quarter ending June 2017. The TTM compounded
Sales growth for the period of 2017-2018 was -51.10%.
Steps Taken to the above problems
Amtek followed a 3 pronged strategy.
1. Debt Realignment Program/ Strategic Debt Restructuring
Amtek embarked on a debt realignment program with its lenders. We have also
learnt that in a recent meeting held at Mumbai, Banks led by IDBI have agreed to
convert a part of debt into equity. This helps the lenders to take controlling stake by
initiating the SDR that helps them to convert a part of debt into equity in cases where
Debt restructuring program has failed to revive the company.
2. Allowing FIIs on it’s Board
By end of the year 2016 Amtek was aiming to close a deal with Institutional Investors
for a stake in the company. The FII will take 1 board seat. There is no confirmed
amount of funds that will be raised by the company, but the guesses were around Rs
3000 Cr.
3. Realignment of Payments
Amtek is also in talks with consortium of banks to realign the payments. Under this
Amtek is expecting to get 2 years of time on the repayment of the principal amount
while the interest payments would continue. As per senior exec of the company, this
arrangement is almost done and will be in effect from the first quarter of 2016-17.
4. Infusion of capital by promoters
The promoters also infused a capital of Rs 200 cr each in 2 years which increased
the promoter group stake to 49.99%.
5. Sale of Amtek Tekfor
Amtek Group sold the Amtek Tekfor which was primarily based overseas and had
operations in Italy, Brazil and the US. This combined with sale of stake in some non
core businesses in India fetched about Rs 6500 Cr.
6. Changes in Operational Front
Amtek is implementing consolidation measures and also adapting to lean
manufacturing practises to improve productivity and reduce costs.
7. Deleveraging Plan
The company formulated a strategy of deleveraging based on the monetization of
key assets and some non core assets. This strategy is relying that a significant
equity value is created in these assets that will Amtek in the purpose of reducing the
debt in Indian operations. As per the last update Amtek is in the progressing line with
the management expectations.
8. Reducing the Debt
Amtek has taken an highly strategic decision on this front by bringing in new investor
and use that investment to further debt reduction. Amtek has been in discussions
with potential investors and is expecting to bring this plan into action as early as
possible.
9. Bank Debt Conversion Scheme
This scheme of Amtek has received a quite encouraging response major equity
investors and banks. This also shows that the financial market is having quite a level
of confidence in Amtek’s strategic decisions and they are also happy with the level of
progress they have made in strengthening the company’s balance sheet. This also
shows that the financial market has not totally lost its hope in Amtek and is expecting
its strategic decision will help the company in reviving.

References:
 http://www.business-standard.com/article/opinion/amtek-auto-more-miles-to-
go-114060900319_1.html
 http://www.amtek.com/ir/2013/AAL_FY2013_ANNUAL_REPORT.pdf
 https://www.investopedia.com/ask/answers/062315/what-are-key-differences-
between-financial-risk-and-business-risk-company.asp
 https://www.ibef.org/industry/autocomponents-india.aspx
 http://www.moneycontrol.com/financials/amtekauto/ratiosVI/AA01#AA01
 https://www.thehindubusinessline.com/markets/stock-markets/amtek-auto-
stock-zooms-70-intraday-ends-49-higher/article7641462.ece
 http://www.financialexpress.com/industry/with-debt-of-rs-14725-cr-
amtek-auto-looks-to-send-right-message-to-lenders/281032/
 https://economictimes.indiatimes.com/banks-to-assume-control-of-two-
units-of-amtek-auto-for-defaulting-on-bond-
repayment/articleshow/53217590.cms
 http://www.amtek.com/ir/Amtek_Auto_Q1_FY17_Presentation.pdf
 http://www.amtek.com/
 http://www.amtek.com/mfl.php