Amtek Auto motors into CB market

Second Indian auto parts manufacturer accesses convertible bond market.

Amtek Auto raised $125 million yesterday (April 26) becoming the second auto parts manufacturer in as many weeks to tap the CB market. The deal also marked the fourth transaction this year from Barclays Capital, which has shot up the Indian league table rankings from nowhere to second behind JPMorgan.

The deal came at the wide end of indicative terms, underscoring how price sensitive investors remain in weak markets. It also priced much wider than its immediate predecessor Bharat Forge, although this is largely a function of a weaker credit and smaller scale - Amtek's market cap is one-third the size of Bharat Forge and its annual sales almost half.

Pricing came at par on a coupon of 0.5% and redemption price of 130.087% to yield 5.85%. The coupon had been marketed at 0% to 0.5%, the yield at 5.35% to5.85% and the redemption price at 127% to 132.9%.

The conversion premium was fixed at a 25% premium to the company's VWAP of Rs167.864. The stock closed at Rs170. Again this represented the outer end of a 25% to 30% range.

But the real premium was lower thanks to the inclusion of three re-sets - the first with a 90% floor in year two, followed by an 80% floor in year three and 70% in year four. The non-puttable deal also has a three-year call option with a 130% hurdle and there is a $25 million greenshoe.

Underlying assumptions comprise a bond floor of 93.77%, implied volatility of 25% and theoretical value of par. This is based on a credit spread of 260bp, 1% dividend yield, 5% borrow cost and 35% volatility assumption.

Bharat Forge, which priced in mid-April, offered investors two $60 million tranches. Tranche A had a 0.5% coupon, 5.25% yield and redemption price of 126.778%. The conversion premium was fixed at 40% and there was a two-year call with a 120% hurdle.

Trance B also had a 0.5% coupon, a yield of 5.75% and redemption price of 129.939%. There was a 60% conversion premium and three-year call with a 130% hurdle.

Both tranches were priced off a tighter credit spread of 180bp and a 30% volatility assumption. They had higher bond floors of 95% (Tranche A) and 97.3% (Tranche B), but a more expensive implied volatility level of 27%.

Both tranches are still being quoted just above par.

Like Bharat Forge before it, Amtek had a concentrated order book of 25 accounts and an oversubscription ratio of 1.5 to two times. About 30% to 50% of the deal was stripped up front.

On full conversion, the deal represents about 27% of Amtek's $375 million market capitalization. The stock is currently valued at about 10 times 2005 earnings and is down 4.49% year-to-date.

On a one-year basis, however, it has performed well in line with the domestic auto parts sector. It has returned 53.08% on a one-year basis and almost doubled from its low of Rs90 in June 2004.

All analysts, who cover it, have a buy recommendation on the stock. Amtek and Bharat Forge have both been benefiting from the combination of strong domestic sales and the global outsourcing trend for auto parts.

Domestic car sales, for example, are reported to have climbed 30% in the year ended March 2005, while exports were up from $760 million in 2003 to $1 billion in 2004. The Indian Auto Components Manufacturers Association has set an annual export target of $5 billion by 2101.

Amtek currently exports about 15% of total production. It has just released third quarter figures, which showed net income rise 53% to Rs262.4 million ($6 million).

Proceeds from the convertible are being used to fund the company's Rs396 million capex plan.