For 2QFY2009, Amtek Auto (AAL) reported 24.6% de-growth in net sales to Rs241.3 crore (Rs319.9 crore), which was below our expectation.
This came on the back negative y-o-y growth in domestic and exports sales volume. The company’s bottomline, which recorded 68.5% y-o-y decline to Rs20.4 crore (Rs64.7 crore), came in below our expectation.
Overall slowdown in the Auto Sector along with substantial increase in raw material costs impacted the company’s 2QFY2009 net profit.
During 2QFY2009, the company clocked a 751bp y-o-y fall in EBITDA margins owing to higher raw material costs, which increased 18.1% y-o-y and accounted for 66.2% of sales (61% in 2QFY2008).
This clearly reflects the cost pressure being faced by the company on account of the sharp y-o-y rise in its core raw material price, steel.
We believe industry valuations are likely to remain subdued in the near term due to overall slowdown in the sector. A substantial portion of the company’s revenue comes from the CV segment, where recovery looks unlikely in the next couple of quarters.
Further, a major portion of the company’s consolidated revenue comes from the US and European markets, which are almost in recessionary mode indicating further stress for the company.
Additionally, the FCCB loans make up a major portion of the company’s loan book. Out of a total of Rs2,919 crore in FCCB loans, Rs75 crore is due in June 2010 and Rs1,073 crore in June 2011.
Since the exercise price is way above the current market price, it looks unlikely that it would be converted to equities.
Hence, the company may have to raise fresh loans thereby increasing its interest costs. On account of these factors, we have revised our FY2009E and FY2010E EPS downwards to Rs7.3 (Rs14) and Rs9.6 (Rs17.5), respectively.
At Rs51, the stock is trading at 9.1x its FY2010E consolidated adjusted EPS and 0.2x BV, which is substantially lower than its historical valuation.
It must be noted that the business mix of the company would improve FY2010 onwards in line with our estimated revival of the Indian Automotive Industry.
However, since the short-term depressed economic (and earnings) environment would not adequately be reflected by the P/E multiple, and keeping in mind the company’s prospects beyond FY2010, we have valued the company on its Book Value.
We maintain a BUY on the stock with a revised 18-month target price of Rs110, which values the company at 0.5x FY2010E BV (adjusted for FCCB interest impact).