Amtek deal positive; auto sales to dip ahead: StanChart

Auto component maker Amket Group has entered into a significant acquisition deal with German company, Neumayer Tekfor. Amit Kasat of Standard Chartered believes the business deal is a strategic fit for the Amtek group and he is positive on the stock post its acquisition agreement.

Kasat further added that the EBITDA of Neumayer Tekfor last year stood at 40 million euro and with its acquisition, Amtek's revenue will be equally split between the domestic and international operations.
Meanwhile, wage inflation will be a key focus in FY14 and FY15, informed Kasat. He feels wage inflation is increasing to keep causing labour grievances. "Wage inflation will be a key focus in FY14 and FY15 because the economy is slowing down and for most of the auto companies the volumes are not growing. And wage inflation is definitely going to go up," he explained. According to him, the severity of slowdown will rise in the tractors segment and it will be negative for Mahindra and Mahindra.
Moreover, Kasat said that the auto sector slowdown is worse than expected. He also expects April and May to be washout for auto sales. Here is the edited transcript of the interview on CNBC-TV18. Q: On Amtek Auto has seen a significant global deal with Tekfor. What do you make of this acquisition?
A: There are a couple of things on any acquisition, one is what business you are acquiring, whether you get a technological edge, customer widening or the global footprint. From the business perspective, the acquisition is strategically fit for the Amtek Group and the company knew the group from 2005 as they had a joint venture in India and they were having two plants in India.
Second part to any acquisition is at what cost it comes. The cost of acquisition is not yet disclosed by the company. It is strategically fit and I am positive on the acquisition from the business model perspective. Q: Any more details that you can share about the acquisition? All we know is the kind of sales it generates. How profitable is this company, what kind of blended margins would it look like and what kind of market can the combine now attack?
A: The Tekfor Group definitely gets categorized in a technological age company globally. That is the way the group is known to us also. Second, the revenue for the company is 500 million euro with EBITDA of around 400 million euro. At the EBITDA perspective it is positive and there are no further details on the same.
On the client base, definitely they have a very good client base for the group. They have the Volkswagen Group as a whole which is an important client, they have BMW as well as Ford. So the client base is also very superior. What it gives to the Amtek Group is before the acquisition of this company, Amtek’s revenue from India used to be 85 percent and 15 percent of the revenue used to get manufactured outside India. With this acquisition, the business model becomes very stable with 50 percent coming from India and 50 percent from the international markets.
_PAGEBREAK_ Q: Just a few months back Mahindra & Mahindra (M&M) was on the top buy list for most funds and for brokerages. Have things turned around for Mahindra & Mahindra (M&M) a little bit in the last few weeks?
A: I think so. The standalone business for M&M was doing extremely well, whether it was on the tractor side or the utility vehicle side. In the tractor segment, there is a slowdown which we are envisaging and the slowdown is going to extend more in the coming months.
On the utility vehicle segment, definitely because of the Budget and since M&M is the only company which gets impacted negatively, most of its product portfolio falls into that increase in excise duty. So there is some press on the standalone business. Looking from a consolidated basis, there are many businesses that they have acquired or initiated in the last five years. Market does not see any turnaround happening in most of these businesses. I think it will remain lackluster from the current levels. Q: On account of the labour issues which have cropped up of late in the number of auto companies, which one do you think would be affected the most?
A: Wage inflation will be a key focus in FY14 and FY15 because the economy is slowing down and for most of the auto companies the volumes are not growing. And wage inflation is definitely going to go up. There is no company which will stand out on that, each and every company will have its own give or take on the issue but, the wage inflation across the sector definitely is going to go up in FY14 as well as in FY15. Q: It has been a fairly disappointing run in terms of the monthly sales figures this time around. Recently Maruti Suzuki announced a one day stoppage of production at their petrol plant. Are you concerned about what is happening with these auto trends and that they may be falling much sharper than people expected?
A: We were saying that the same thing was happening for the last one quarter. There is a slowdown across the segment, but the severity of the slowdown is something which surprised us. If you look from a sub segment perspective, M&HCV segment is severely impacted followed by tractors and then two wheelers and the passenger car industry.
Before the Budget, there was some anticipation which was there in most of these companies in terms of the stimulus which the companies will get for each of these segments and it has not happened. So it is a realignment which has happened for most of the companies, where the production to the retail sales has been realigned now.
March is the end of the financial year and every company has its own targets for the year end. So April and May definitely will be a washout for most of these companies but, March will be slightly better than what we have seen in February. However, the pain in terms of the slowdown definitely continues at least for a quarter or two.