May cut some stake in subsidiaries if required: Amtek Auto

Below is verbatim transcript of the interview:

Q: Across your group and in Amtek Auto excellent topline growth, 25 percent or thereabouts but net profit is flat to lower for you it is lower in Amtek Auto. In Amtek India as well net profit is lower by about 8 percent, as well in Ahmadnagar Forgings, it is a muted profit growth and the only element that stands out as an issue is interest cost, up across the board, what led to this higher interest cost, is it all the acquisitions and will we see that coming down?

A: Yes, I think you need to look beyond the figures a bit in terms of the profit after tax (PAT) figures, there is a change of reporting that we have gone ahead with, a new companies act. So that is one of the adjustment that you will see. Also, we have some one of deal costs for the acquisition and so, it is not as clean as what you are talking about there. When you strip them out, it is still pretty healthy.

Q: What is one of deal cost that you have incurred this quarter?

A: They were the deal costs for the acquisitions overseas.

Q: Could you quantify the amount?

A: We will come out with that later when we do our earnings analysis. What we want to focus on is a tremendous topline, which underlines the strategy over the last 18 months so we are now starting to see the full benefit of the acquisitions with the 38 percent growth in topline, margins are still holding very firm due to manufacturing programmes we are developing across the whole group and obviously the growth across all the units is quite good.

Q: The interest cost number suggests a healthy growth in margins across the group and in Amtek Auto as well a 200 bps jump in EBITDA margins as well as 25 percent growth in total income. Is this maintainable, what is the sense you are getting with the performance in the current quarter and what do you see in terms of orderbook, will this be the runrate that we should expect?

A: We have got two-three things coming through. Last year was a record new order intake for the group with over Rs 10,000 crore new orders which we have reported in the last earnings call.

The momentum is carried on into this quarter. Another Rs 2,600 crore of new business won in this quarter which is encouraging. Obviously the market is mixed of which passenger cars starting to improve slightly but we are heavily - our major customer is Maruti Suzuki and they are still very strong in the Indian market.

Overseas, we are very strong with BMW, we are doing quite well in Germany and exports are doing well out of Germany and obviously we have Jaguar-LandRover in our UK facilities, they are still doing extremely well.

So this pocket of good new there, obviously there is some downsides, our Brazilian business is struggling because of the economy in Brazil and some of the more southern European countries are lagging behind a little bit.

Q: You have reported for Neumayer Tekfor an improvement in margins from 6-11 percent is that right? Is there scope for more?

A: Now we have restructured all of our businesses overseas under now our international holdings company in Singapore. That business reported 10-11 percent EBITDA margin, which is a very healthy margin underpins the restructuring we did both in Neumayer Tekfor but also we are now nearly completing our restructuring in the Cooper organisation, which we also purchased last year - both of these synergy plans are now well on the way between India and overseas.

Q: What have you got for four companies in total, do you have any plans at all of consolidating these businesses?

A: There is a lot of talk and we have discussed what we should be doing in the medium-term to long-term. We haven’t ruled anything out.

There are no formal discussions and decisions, in the board meeting yesterday we did take an approval both from the board for the finance committee to investigate the possibility of reducing our shareholders, holdings in some of the subsidiaries, which will obviously then allow us to look at debt reduction plan, which was always part of our strategy from the last two-three quarters.

Q: Which are these subsidiaries?

A: We have got the one you talked about with Amtek India, Ahmednagar Forgings, we hold a healthy substantial amount of equity in those companies and we are looking to see whether maybe we should reduce that and raise some capital to reduce debt.

Q: Is there any debt reduction target, it is Rs 15,000 crore right?

A: Yes, we have always said our net debt should be below 2.5-3 percent, it is currently now at 4-4.5ish and we have plans in place over the next 18 months to achieve that target. This is just one of the options we are looking at.

Q: But you will still look out for acquisitions?

A: We are always on the lookout. If you look at our growth story and our successful track record of acquisitions, yes, we would look at underperforming assets whether there are in India or abroad and look seriously, we never overpay for any businesses, which is strength of Amtek and we have a successful track record of turning the businesses around. So yes, we continue to look.

Q: How soon will the finance committee explore the option or come out with an answer about reducing your stake in subsidiaries in order to raise some money by which you can pare down your debt? Any timeline?

A: The board yesterday approved the finance committee to investigate the options and report back to the board. So the next board meeting is in three months time. So hopefully in that time the committee will come up with some options for us to discuss.

Q: How is the demand situation? We don’t get a very positive sense from the domestic auto markets, there seems to be a downturn in the two-wheeler market after a decent showing last quarter or last year - not decent, just better than expected - what is the sense you are getting, is the domestic auto market showing signs of recovery or is it still very placid?

A: I think there are green shoots of recovery in a number of areas, obviously last quarter was slightly disappointing if we take areas like tractor market, the tractor industry was significantly lower last quarter but we are expecting that to pick up from the middle of this year.

I think passenger cars although it is running 2-3 percent on a year-on-year (Y-o-Y) improvement in the last quarter, I would expect that to be more like 5-6 percent as we go through the year.

Interest rates have been reduced, there is a thought maybe some more interest rates will come along and all these are good signs in terms of passenger cars and in particular two-wheelers, two-wheelers are dependent on the interest levels. We will see a slight improvement as we go through this year.

Q: Give us some number to cling to in terms of over a 24-months period, what kind of topline growth can we expect and what level of margins we can reasonably price in, 31-32 percent?

A: I will look at consolidated margins. If you look at our consolidated margins, we are at 21-22 percent. We are annualising sales at around Rs 19,000 crore. I would be disappointed if we didn’t reach Rs 22,000-23,000 crore very soon and our intent is to hold over consolidated margins. So that gives you an outline of where we are looking for in the next coming months.