Mumbai: New Delhi-based Amtek group, one of India’s largest auto component makers, is shifting plant and machinery from overseas subsidiaries to India to lower manufacturing costs, besides cutting excess capacity and diversifying into the aeronautics business.

Taking stock: Chairman and managing director Amtek group Arvind Dham at a factory in New Delhi. He continues to be bullish and feels that the crisis has bottomed out. India Today

The company had raised $150 million in 2005 and another $250 million in 2006 through foreign currency convertible bonds or FCCBs and loans from commercial banks. About $100 million of this has been retired.

Amtek is relocating units in Letchworth and Tipton in the UK and Stanberry and Kellogg in the US.

“We are restructuring the overseas operations and moving them to India, " said Arvind Dham, chairman of the group.

This, according to him, will create capacities in a low-cost manufacturing base that will give exports relatively higher margins.

The sharp fall in revenue as well as profits has largely been on account of large-scale inorganic expansion, including overseas acquisitions, between 2002 and 2007. The objective was to access technology as well as developed country markets.

The global auto industry has been severely hit by the economic downturn that began in early 2008 and those investments now weigh heavily on the firm’s balance sheet.

This has also forced Amtek to reverse its export-led business model as revenue from overseas operations plummeted from $250 million in the fiscal year to March 2008 to $20 million last year.

For the fiscal year ending March 2008, the group had sales of Rs5,700 crore and profit of Rs550 crore. In 2009, sales dropped to Rs2,200 crore and sales to Rs350 crore.

“Exports are finished," conceded Santosh Singhi, chief financial officer at the group.

Branching out

With countries like China, Hungary, Poland and Thailand also saddled with excess capacity and looking for markets for their products that are more cost-competitive than Amtek, Singhi is sceptical about the firm’s exports recovering. Amtek is also increasing its focus on non-auto businesses in the domestic market, such as railways, aerospace and defence.

The group is targeting business of Rs300-Rs500 crore from the defence industry and at least Rs2,000 crore from railways where margins are relatively higher.

It is also studying the aeronautics business for opportunities in aircraft and airport equipment.

“We still believe what we did was right and we will again follow the same path to grow," Dham insisted, adding that he is scouting for an overseas acquisition in the aerospace industry.

“Even if we buy a company abroad, lots of key functions will have to be relocated to India, so that we enjoy high margins on them," he said.

In the next three to five years, Dham is confident that the non-auto segment should contribute?40% in the turnover.

An uphill drive

Amtek, like Bharat Forge Ltd, Sona Group Ltd and Mahindra Systech Ltd, wanted to leapfrog into the big league through aggressive acquisitions overseas. In fact, between 2002 and 2007, it has made at least a dozen acquisitions in the US, UK and Germany.

“Nobody expected the industry to go through such a traumatic experience outside India," said Dham, adding that the company suffered mainly because of acquisitions made in the US and Europe.

In the US, which is struggling with a deep recession, the demand for cars was down to nine million from 17 million in 2007. In Europe, it had shrunk 30%.

But Dham is optimistic that the restructuring will yield quick results. “We will now be in a growth phase," he said.

Analysts, however, are not convinced yet. “It’s going to be a struggle for them as the market in Europe and the US has still to revive," said Ramnath S., an analyst at SSKI-Securities Ltd, a Mumbai-based brokerage. According to him, Amtek’s entire outsourcing story has gone wrong.

Abdul Majeed, partner at accounting and advisory firm PricewatehouseCoopers India, said the larger question should be how quickly the company is able to leverage the cost efficiency of its India units to offset high costs in developed markets.

“It throws up interesting opportunities for such firms," Majeed said. “After the financial crisis, the global manufacturers have heightened their pace to shave off costs by sourcing from low-cost countries."

Singhi, the group’s chief financial officer, said while Amtek’s profit margins have fallen to 14%-15% in 2008-09 from 18%-19% in 2007-08, margins from the exports business have dropped from 28% to 7%, largely because of underutilized capacity and high fixed costs.

However, because of capacity expansion at its Daruhera unit near Gurgaon and at Pune, margins will be unchanged on increased depreciation costs, he said.

In a 4 August report, Ramnath said that given the sustained margin pressure at its key subsidiaries, SSKI-Securities expects the company to post a loss of Rs52.5 crore for the fiscal year ending March 2010 and a profit after tax of Rs62 crore the year after.

While Dham fixes structural weaknesses, Singhi has his hands full paying off at least $300 million in liabilities due June 2011. “With this problem in mind, I can’t look forward," Singhi admitted.

Several options

The company is considering a series of steps to reduce the $300 million liability. It is negotiating with the bondholders and weighing several options, including conversion of FCCBs into equity and rolling over part of the debt beyond 2011.

The debt restructuring, according to Singhi, will be finalized in September.

Meanwhile, on 3 September, in a statement issued to the Bombay Stock Exchange, Amtek Auto said it had opened a foreign currency convertible bond issue to raise $175 million. Jefferies International Ltd will manage the issue of the securities that are to be listed on the Singapore Stock Exchange, the auto parts maker said. The money raised will be used to retire part of the old debt.

Both Dham and Singhi are confident that the worst is over for the company. While Dham is bullish, Singhi prefers to be realistic.

“I think things have bottomed out and one can see a small curve going up, " said Dham.

Singhi had a slightly different take. “We feel the (global) auto sector will start coming back from 2011 onwards. We need another two three years from there to meet all our obligations."

The merger of Amtek India with Amtek Auto awaits approvals from lenders and will be done in another six months.

In July 2008, Amtek had announced the merger of Amtek India, Ahmednagar Forgings and three unlisted companies with Amtek Auto through a share swap to strengthen its balance sheet and minimize overhead costs. The merger was to be concluded by December 2008.