Research Report

1. CMP : Rs. 174
Recommendation: Buy
Sector: Automobile Ancillaries
Face Value: Rs. 2.00
52 Week High/Low: 274.40/62.05
Market Cap (Rs. Cr): 3,833.53
One Year Performance of the Stock
Industry Overview
The Indian auto component industry is one of India's sunrise industries with tremendous growth prospects. From a
low-key supplier providing components to the domestic market alone, the industry has emerged as one of the key
auto components centres in Asia and is today seen as a significant player in the global automotive supply chain. India
is now a supplier of a range of high-value and critical automobile components to global auto makers such as General
Motors, Toyota, Ford and Volkswagen, amongst others. The fortune of auto ancillary is closely linked to those of the
auto sector. Demand sewing in any of the segments has an impact on auto ancillary demand. Margins in the
replacement are higher than the OEM market. The OEM market is very competitive and component manufactures
have to compromise to gain more bulk orders. And delivering time and schedule has to be followed strictly to gain
trust. Indian companies are also expanding their footprints abroad. For instance, TVS Logistics, a part of the TVS
group, acquired one of the largest after-market logistics companies in the UK. But Indian auto ancillary sector has
traditionally suffered from the poor quality. One reason may be that, this sector is not very well organized. The
organization sector has been restoring to increased automation to reduce defect level.
Lower labour costs give Indian auto ancillaries and absolute cost advantage. ACMA no. suggests that wage cost
account for 3% to 15% of revenues for Indian manufacturers as compared to 20 to 40% in US. India is mainly export
of forging, casting, and plastics historically. But this is changing with more manufacturers investing in up gradation of
technology in recent years.
.

2. GROWTH DRIVERS OF INDIAN AUTO ANCILLARIES INDUSTRY
Destination India:
According to the Investment Commission of India, global automobile manufacturers see India as a manufacturing
hub for auto components and are rapidly increasing the value of components they source from India due to
following facts..
 India’s cost competitiveness in terms of labour and raw material.
 Its established manufacturing base.
Makers of luxury cars are increasingly looking at making India a sourcing hub for components, besides using more
local components in cars for the Indian market.
BMW is likely to sign the first direct sourcing deal with local vendors by the end of this year. Skoda Auto India is
looking at increasing localization for its small car Fabia to over 50 per cent over the next two years. Mercedes Benz
India expects growth in sourcing from India to continue at 10 per cent.
Supply Side Drivers:
*Competitive
advantages facilitating
emergence of
outsourcing hub.
*Technological shift;
focus on R&D
Demand Side Drivers:
• Robust growth in
domestic automotive
industry.
Policy Support:
•Market liberalisation
•Establishing special
auto parks and virtual
SEZs for auto
components.
•Lower excise duty on
specific parts of hybrid
vehicles.

3. Porter Five Forces Model
Supply: Low for high technology products. Unorganized sector dominates the domestic component market due to
excise benefits. Generally, excess supply persists.
Demand: Linked to automobile demand. Export demand is linked to the increasing acceptance towards outsourcing.
Foreign Investments:
India enjoys a cost advantage with respect to casting and forging as manufacturing costs in India are 25 to 30
per cent lower than their western counterparts. Seeing the growing popularity of India in the automotive component
sector, the Investment Commission has set a target of attracting foreign investment worth US$ 5 billion for the next
seven years to increase India's share in the global auto components market from the existing 0.9 per cent to 2.5 per
cent by 2015.
Swiss auto clamps maker, Oeitker Group, has inaugurated the first phase of its manufacturing facility in
India. It has invested US$ 12.58 million in Phase I and hopes to start work on the second phase by the end of next
year.
Indian
Auto
Ancillaries
Sector
Will intensify, as global players
will enter the market leading
to consolidation.
Dereservation of SSI will result
in access to capital and
technology
Capital, technology, OEM
relationships, customer
service, distribution network
to meet replacement demand
Companies operating in the
export market face
competition at a global level.
At the domestic level, market
structure is fragmented for a
large number of ancillary
products. Most companies
adopt low cost and
differentiation strategies. In
some products (like batteries),
only two or three companies
control over 80% of the
market
Low with OEMs. Relatively
high in the replacement
market

4. The Tamil Nadu state cabinet recently gave clearance to the French tyre major, Michelin’s proposal to set up
a US$ 851.5 million Greenfield project near Chennai, Tamil Nadu.
A memorandum of understanding (MoU) has been signed by the US auto giant, Ford Motors, with the Tamil
Nadu government to set up a unit with a capacity of 250,000 engines a year.
German auto company, Volkswagen has commenced sourcing components from India for its Russian plant
and is also looking at sourcing light systems, plastic related items and metals for its European plants.
Domestic Investments:
The market is so large and diverse that a large number of players can be absorbed to accommodate buyer
needs. The sector not only has global players looking to invest and expand but leading domestic component
companies are also pumping in huge sums into expanding operations. An auto park is coming up near Hyderabad
with investments worth over US$ 409.30 million from around 34 automotive ancillary units. This is in addition to a
US$ 245.59 million Greenfield project being set up by MLR Motors near the park.
Moreover, Indian tyre makers are rolling out investment plans worth US$ 1.24 billion, due to the rising
popularity of radial tyres in the commercial vehicles segment.
Some other investments include:
Apollo Tyres is to scale up investment at its upcoming radial tyre project at Oragadam in Tamil Nadu from
US$ 106.4 million to US$ 447.04 million. Hero Motors will invest US$ 19.84 million in association with Austrian firm
BRP Power train for manufacturing automotive transmissions in India. Indian arm of Swedish automotive component
maker SKF is investing US$ 30 million in a new ball bearings manufacturing plant at Haridwar.
Policy Initiatives
The government has taken many initiatives to promote foreign direct investment (FDI) in the industry.
Automatic approval for foreign equity investment up to 100 per cent of manufacture of automobiles and
components is permitted. The automobile industry has been DE licensed. There are no restraints on import of
components. The government has envisaged the Automotive Mission Plan 2016 to promote growth in the sector. It
targets:
 Emerging as the global favourite in the area of design and manufacture of automobiles and auto components.
 Taking the output to US$ 145 billion, accounting for more than 10 per cent of the GDP.
R&D
• Joint R&D with
Indian companies
for new product
development and
process
innovation
Process&Design
• Partnerships
with Indian SMEs
to address
product and
process
technologies
• Offshoring
manufacturing
design work to
JVs or partners
based in India
CustomerService
• Opportunity for
strategic alliance
to cover global
customers
Manufacturing
• Greenfield
manufacturing
facilities in India
to meet the
robust domestic
demand potential
• Establish India as
a key link in the
global auto
components
supply chain

5.  Offering additional employment to 25 million people by 2016.
Looking Ahead
 With investments around US$ 15 billion slated for the sector over the next few years, the prospects
for India's auto market are bright.
 Even though India's auto component industry has conventionally relied on exports for its profits, the
domestic market itself is ripe with rapidly growing opportunities.
 Industry experts are hopeful that the country will be able to offset China and other Southeast Asian
countries' traditional manufacturing advantage in the coming years, facilitating the industry's
achievement of its targeted market value of US$ 50 billion by 2015
.
SWOT Analysis
Strengths:
 Global scale of operations.
 Flexible production system.
 New innovative and world class technology.
 High growth rate.
 Amtek is among the world’s largest player in casting, forging, and mchining with global market share of 20% in
turbocharger housing and 15% in ring gears
Weaknesses
 Tight liquidity position, reluctance on the parts of banks to finance vehicles and firming up of interest rates would
affect vehicle demand which in turn could impact the company's revenues and profits.
 Increase in the prices of inputs like metals, fuel oil etc., and movements in exchange rates and volatility in foreign
exchange markets may create pressure on operating margins.
 The Company is also exposed to the risk of Environment and pollution controls, which is associated with such
type of industries.
Opportunities
 A growing middle income population, rise in their average income levels and demand for a better lifestyle, all
augur well for the automotive industry both in terms of personal transportation requirements as well as freight
movement.
 Continued improvement in roads in the coming years is expected to boost automobile demand.
 India continues to be a cost effective source for automotive industry globally both for vehicles and components.
 The Government has continued its thrust on infrastructure despite the economic slowdown. The Power sector is
also showing robust growth potential.
 Responsiveness to changes in market conditions and product profiles. Dynamic and Progressive leadership,
willing to implement change.
 Decreased interest rate will help in cost cutting
 Decrease in price of crude will help in cost cut and it will also increase in demand in automobile sector.

6. Favourable policy measures aiding growth
Threats
 Increase in fuel prices has an adverse impact on automobile demand as was seen in the previous year.
 Hardening of consumer interest rates coupled with tightening of liquidity position and reduction in exposure to
vehicle financing by banks could have an adverse impact on the automotive industry.
 Stringent emission norms and safety regulation could bring new complexities and cost increases for automotive
industry.
 WTO, Free Trade Agreements could make the market more competitive for local manufacturer.
 The domestic passenger vehicle demand could be adversely impacted by the introduction of rapid mass road and
rail transport systems.
 Global economic recovery may take longer than expected, which will affect exports from India.
• Automatic approval for 100 per cent foreign equity investment in auto component
manufacturing facilities
• Manufacturing and imports in this sector exempt from licensing and approvals
• Setting up of a technology modernisation fund focusing on small and
medium enterprises
• Establishment of automotive training institutes and auto design centres,
special auto parks and auto component virtual SEZs
• Set up at a total cost of USD 388.5 million to enable the industry to
adopt and implement global performance standards
• Focus on providing low-cost manufacturing and product development
solutions
• Created a USD 200 million fund to modernise the auto components
industry by providing an interest subsidy on loans and investment in new
plants and equipment
• Provided export benefits to intermediate suppliers of auto components
against the Duty Free Replenishment Certificate (DFRC)
• Concessional excise duty of 6 per cent has been extended up to 31 March 2015 for
manufacturers of batteries supplying to producers of electrically operated vehicles
• Exemption from basic customs duty on lithium-ion automotive batteries for
manufacture of lithium-ion battery packs for supply to manufacturers of hybrid and
electric vehicles

7. Financial Analysis
Company’s debt level
Year 2010 2011 2012 2013 2014
Total debt 380865.88 629175.06 822857.59 1413291.56 1516925.00
Financial performance
RatioYear 2010 2011 2012 2013 2014
Debt to equity 0.83 1.08 1.33 2.00 1.94
Debt to capital 0.45 0.52 0.57 0.67 0.66
Debt to asses 0.40 0.43 0.45 0.54 0.50
Financial leverage 2.05 2.31 2.76 3.39 3.80
Interest coverage 2.91 3.34 2.98 2.33 2.24
Company’s debt is increasing highly because company’s inorganic approach for expansion. Company has
acquired many bigger and smaller companies in recent years. These acquisitions helped it in being a major
market share holder. Ideal Debt to equity ratio is 2:1 but here is below than that so debt to equity ratio
here is not a concern. Increasing debt here correlates with the growth of sales and revenue, so this is good
for company and makes it credit worthy.
Sales growth
year 2010 2011 2012 2013 2014
Net sales 369,084.97 486,211.84 720,698.52 988,874.30 1,545,458.00
CAGR of sales for the period 2010-14 is 33%. The company sales shows steady and consistent growth
Sales growth is powerd by inorganic expansion .
Profitability ratio
PROFITABILTY RATIO 2010 2011 2012 2013 2014
NET PROFIT MARGIN 0.07 0.14 0.10 0.07 0.06
GROSS PROFIT MARGIN 0.25 0.26 0.27 0.23 0.22
OPERATING PROFIT MARGIN 0.16 0.18 0.20 0.16 0.16
PRE TAX MARGIN 0.11 0.17 0.13 0.10 0.09
ROA 0.03 0.06 0.05 0.03 0.03
ROE 0.06 0.13 0.12 0.11 0.13
OPERATING RETURN ON
ASSET 0.06 0.08 0.09 0.08 0.09
RETURN ON TOTAL CAPITAL 0.07 0.08 0.10 0.08 0.11
 Company’s gross profit margin is in the healthy range of 25%, it shows on the operational side the
company is performing at its best. But heavy debt incurred during acquisitions is having a impact on
the net profit margin.
 Return on equity of 13% shows a shareholder can earn a decent return upon investing.

8. Valuation analysis
Year 2011 2012 2013 2014
EV 1,070,335.31 1,318,907.17 1,933,905.83 2,221,205.00
EV/EBIDTA 8.20 6.50 7.79 6.43
EV/SALES 2.20 1.83 1.96 1.44
PE 10.77 4.06 3.95 4.31
BV 248.79 280.02 322.47 355.45
P/BV 0.53 0.39 0.23 0.47
EPS 12.28 26.71 19.16 38.78
 With PE around 4, valuation looks cheap for this company and it is a bargain to invest at this
point of time.
 With EV/Sales ratios around 2 , it is better than the peers.
 Earnings per share has improved very much with CAGR of 31 %.