Auto Ancillary stock – Amtek auto : Follow up

Before we take a deep-dive into the stock, it would be helpful to consider this link.

A look at the latest annual report of Amtek Auto shows

1. Fall in revenue/profits

2. Healthy dividend position maintained

3. Significant fall in Eps

Notes:

1. Significantly dependent on growth of 2,3 wheelers, tractors and commercial vehicles

2. The Indian addressable market fell from $18 bil to $16 bil, share of exports also fell

3. Europe and USA and the largest export markets

4. Indian automotive component and tyre companies serving the European market are attempting to meet European norms for automobile recycling, which is slated to come into effect by 2010.

5. The Indian Government recently reduced the excise duty applicable to automotive components to stimulate growth in the sales of passenger cars and utility vehicles.

6. The World Trade Organisation recently ruled against the imposition of 25 percent import duty on automotive parts by China. Indian automotive component manufacturers stand to gain significantly from the ruling as any cut in the duty will make their products cheaper in the Chinese market, and give them more access to the Chinese markets

Things to watch out for

• Exchange rates

• Trends in global automotive merger & acquisition activity

• Pressure of Counterfeit Components

• Raising Input Cost

• Higher Interest Rates

• Global sourcing of components from China which brings savings of nearly 17-20% as against the 15% to 17% in case of India.

In light of all this evidence the question is what do we think is going to happen within a 3 year horizon?

1. The number of 2,3 wheeler, tractor and com vehicles will explode, at least domestically

2. Export markets will also see a recovery and overcome the short term fall in sales

3. The threat from China remains credible but we should also consider the ISO quality certifications and the sizable domestic market position.

4. Access to credit and interest rates should cease to be a problem compared to last year

Price trends

During the year 2007 to 2008 Amtek practically mirrored the sensex during the crash. It had peaked at 490 and bottomed out at near 60. The subsequent revival in the sensex however did not reflect in Amtek. While most Auto stocks had a significant upswing in the bull run beginning January 09, Amtek has only managed a small rise. We believe that this is because of a cautious attitude towards an industry whose demand is very derived. Given the positive outlook and better results from Auto companies, it is only a matter of time for Amtek to get a slice of the pie and it is in our best interest to take advantage of this valuation.

Auto Ancillary Stocks?

The 1st Feb 2010 edition of The Smart Investor carried an interesting cover on auto ancillary stocks. Given the break neck pace at which monthly sales of auto majors like Maruti, Hyundai, Mahindra, Bajaj, Hero Honda, etc have expanded, it is but obvious that auto ancillary stocks are in for some good times. Production at the above auto majors have expanded so rapidly on the back of recovery that auto ancillary suppliers are finding it difficulty to meet demand. Given that the economy is on a recovery track, it is expected that sales at the mentioned auto majors will be on the uptrend for some time to come, at least for the next 2-3 quarters. In this scenario, we are in preliminary stages of forming a bullish opinion on auto ancillary stocks. A major concern, however, remains about valuation. Has the market factored in the strong growth in automobile sale in pricing auto ancillary stocks?

We are particularly attracted towards Amtek Auto given its low PE ratio. It is presently trading at a PE of 14.2 and a forward PE of 10.1. Its historical price graph is as below -

We are reading up more about this stock to decide whether it is attractively valued or not. In case we agree with present valuations, we may consider to accumulate this stock for the fund.