TEACHING NOTE

AMTEK AUTO

E001 Anish
E009 Vishesh Bagaria
E011 Akash Bajpai
E013 Srinvantu Basu
E028 Sushant Gupta

1. Summary of Case
This case study outlines the case of Amtek Default. It describes the company in
details involving its financial performance before and after the default. It details the
acquisitions made by Amtek auto in the last 2 years which resulted in its Debt-toEquity ratio reaching a peak level. Also its subsidiaries Castex, Metalyst and JMT
have shown a debt-to-equity ratio of more than 2. The case talks about the path Amtek
auto underwent to reach the default state by defaulting on Rs. 800 Cr. Bond payments.
The rating agencies which were a major player in the default have been analysed in
detail. The role of rating agencies have been analysed which could have helped
investors save from the default. The case finally talks about the learnings from the
default for investors, regulators and rating agencies.

2. Target audience
The students of MBA-core who have opted for Fixed Income course
3. Teaching objective
The principal objective of the case study is to understand the default of Amtek Auto
Ltd bonds and its implications. The case helps to understand the organisation structure
of Amtek Auto Ltd. It involves calculation Z score which determines if the bond is
about to default. The discussion in the class would be extended to analysing reasons
for the default and recommending ways in which the default could have been averted.
In addition, the case also analyses the implications of Amtek Auto Ltd being removed
from the F&O segment from 30th October, 2015. It also delves in detail about the fall
in stock prices of Amtek stock down by 80, Castex technologies 90.4%, JMT Auto
59% and Metalyst Forgings 92.1%. The discussion would also extend to role of J P
Morgan and the implication of default on J P Morgan. Also, how J P Morgan exited
the loss making investment to a private equity firm and exited the investment at a loss
15%. The discussion would also involve the audit of the companies and the time of
audit.
This case study can also be used to understand the business and performance
parameters of companies due to such a major default. It talks about the major
acquisitions made by Amtek. The case can also be utilized to study the parameters to
be considered while acquisitions. The discussion can incorporate how and when the
acquisitions turn loss-making.

Objective 1: How Altman Z-sore can be used to identify whether the company is
in the default region or not?
Figure in Millions
Total Assets
Total CA
Total CL
Retained earnings
Pre-tax Income
Interest expense
Revenue
Market Cap.
Total Liabilities
Working Capital(WC)

2,55,132.00
76,275.00
82,790.00
2,137.00
(5,625.00)
14,286.00
1,49,593.00
7,675.00
1,92,739.00
(6,515.00)

Ratios
WC/TA (X1)
RE/TA (X2)
EBIT/TA (X3)
M.CAP/TL (X4)
Revenue/TA (X5)

Value
(0.03)
0.01
0.03
0.04
0.59

X1: Working Capital/Total Assets

X2: Retained Earnings/Total Assets
X3: Earnings before Interest & Tax/Total Assets
X4: Market Value of Equity/Total Liabilities
X5: Sales/Total Assets
Z-Score Formula: 1.2*(X1) + 1.4*(X2) + 3.3*(X3) + 0.6*(X4) + 1* (X5)
A score below 1.8 means the company is probably headed for bankruptcy, while
companies with scores above 3.0 are not likely to go bankrupt. The lower/higher the
score, the lower/higher the likelihood of bankruptcy.
Z-Score of Amtek Auto Limited: 0.7033
Score of 0.7033 clearly indicates that the company was in the default region as per
balance sheet figures.

Objective 2: How Beneish M-sore can be used to identify whether the companys
balance sheet is doctored or not?

2015
Account Receivables
Receivables
Gross Profit
Total Current Assets
Total Assets
Net PPE
DDA
SGA
CL
LTD

25,634.00
1,49,593.00
39,820.00
76,275.00
2,55,132.00
1,40,130.00
11,989.00
7,697.00
82,790.00
94,190.00

DSRI
GMI
AQI
SGI
DEPI
SGAI

0.95
1.44
2.87
0.97
0.59
1.07

LGVI
TATA

1.06
(0.14)

2014
27,911.00
1,54,546.00
57,486.00
85,086.00
3,00,385.00
1,99,409.00
9,785.00
7,431.00
81,810.00
1,14,809.00

Days' sales in receivable index

Gross margin index
Asset quality index
Sales growth index
Depreciation index
Sales and general and administrative
expenses index
Leverage index
Total accruals to total assets

The Beneish model is a mathematical model that uses financial ratios and eight
variables to identify whether a company has manipulated its earnings. The variables
are constructed from the data in the company's financial statements and, once
calculated, create an M-Score to describe the degree to which the earnings have been
manipulated.
Once calculated, the eight variables are combined together to achieve an M-Score for
the company. An M-Score of less than -2.22 suggests that the company will not be a
manipulator. An M-Score of greater than -2.22 signals that the company is likely to be
a manipulator.
M-Score Formula: 4.84 + 0.92*(DSRI) + 0.528*(GMI) + 0.404*(AQI) +
0.892*(SGI) + 0.115*(DEPI) - 0.172*(SGAI) + 4.679*(TATA) - 0.327*(LGVI)
M-Score of Amtek Auto Limited: -2.3
Score of -2.30 shows that the balance sheet was not manipulated.

Objective 3: Show how frequently in the past Credit Rating agencies have
changed rating of a company?

CRISIL's average one year transition rates for long term Ratings
Rating

One year average Transition rates, between 1988 and 2014

AAA
AA
A
BBB
BB
B

CRISIL AAA

97.21%

2.72%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

CRISIL AA

1.41%

92.96%

4.78%

0.58%

0.19%

0.03%

0.02%

0.03%

CRISIL A

0.00%

3.31%

87.80%

5.95%

1.88%

0.15%

0.30%

0.63%

CRISIL BBB

0.00%

0.05%

2.50%

87.58%

7.70%

0.56%

0.34%

1.26%

CRISIL BB

0.00%

0.02%

0.01%

3.46%

87.33%

3.95%

0.64%

4.60%

CRISIL B

0.00%

0.00%

0.01%

0.06%

6.64%

84.43%

0.59%

8.27%

CRISIL C

0.00%

0.00%

0.00%

0.20%

1.84%

15.96%

62.07%

19.94%

ICRA: One Year Transition Matrix of Short term: Avg. of last 10 years
Avg. 10 yrs. [ICRA] A1+ [ICRA] A1 [ICRA] A2 [ICRA] A3 [ICRA] A4
[ICRA] A1+
96.70%
2.70%
0.50%
0.00%
0.00%
[ICRA] A1
10.40%
77.50%
10.70%
0.80%
0.20%
[ICRA] A2
0.50%
5.80%
85.30%
6.10%
1.60%
[ICRA] A3
0.00%
0.10%
5.40%
83.90%
9.10%
[ICRA] A4
0.00%
0.00%
0.00%
2.10%
94.30%
[ICRA] D
0.00%
0.00%
0.10%
0.20%
11.40%

[ICRA] D
0.00%
0.40%
0.60%
1.60%
3.70%
88.40%

One Year Transition of rating : 2014-15

2014-15

B+

BB-

BB

BB+

A-

A+

AA-

AA

AA+

B+

32.48%

20.32%

7.04%

3.06%

BB-

24.54%

28.71%

5.58%

9.46%

BB

13.96%

24.09%

20.06%

16.57%

BB+

7.96%

16.05%

17.87%

19.64%

A-

1.20%

2.19%

27.23%

19.44%

1.96%

25.36%

36.79%

10.98%

1.21%

A+

11.24%

39.36%

33.04%

8.98%

1.17%

AA-

1.57%

14.49%

41.35%

30.71%

9.72%

AA

3.13%

15.60%

39.07%

36.39%

4.66%

AA+

2.87%

11.04%

56.73%

20.97%

Even though the past experience of rating agencies tells that, their view can go wrong
on credit rating, but still banks are inclined to believe in these without having proper
internal analysis and checks. Companies tend to go for rating-shopping and the best
rating is used to obtain loans. So the banks need to be more proactive in identifying
the underlying risk of investment.

Also the comparative analysis of various rating agencies shows that different rating
agencies show varied level of competence and this historical data should be relied on
to prefer rating agency while extending loan.
% of rated companies defaulting
10.00%
8.00%
6.00%
4.00%
2.00%

CRISIL

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

0.00%

ICRA

The above graph show that CRISIL performed better than ICRA between 2008 and
2012, post which ICRA is performing better. The difference in performance is also
substantial with *% of companies rated by ICRA defaulting as compared to on 3% by
CRISIL in 2009.
Below is the table showing no. of companies rated by CRISIL in 2008 and 2014
6000
5000
4000
2014

3000

2008

2000
1000
0
AAA

AA

BBB

BBB

Objective 4: Using Mertons Model and Altmaz Z-score to calculate the credit
risks and default risks
Analysis:

In 1974 Robert Merton proposed a model for assessing the credit risk of a
company by characterizing the companys equity as a call option on its assets

This model assumes that a company has a certain amount of zero-coupon debt
that will become due at a future time T. The company defaults if the value of
its assets is less than the promised debt repayment at time T
The equity of the company is a European call option on the assets of the
company with maturity T and a strike price equal to the face value of the debt.
The model can be used to estimate either the risk-neutral probability that the
company will default or the credit spread on the debt

SHORT TERM DEBT

Year

Risk-free
Rate

Time to
Maturity

Market
Capitalization (in
Lakhs)

Value of
Debt

Value of
Firm

Volatility
of Stock
Price

Risk-free
Debt

2015

7.72%

1 2,08,324.00 98,667.00

6,08,603.00

54.93% 1,92,846.50

2014

8.70%

1 1,15,290.00 4,44,271.00

8,20,392.50

42.06% 1,05,683.70

2013

7.80%

1 69,604.00

4,67,584.00

36.95% 64,381.22

Current
Leverage

d1

d2

0.32

2.37

1.82

0.01

0.03

1206.79

0.13

5.08

4.66

0.00

0.00

0.14

5.55

5.18

0.00

0.00

N(-d1)

1,31,174.00

N(-d2)

Riky Debt (B*)

PD

R-r

191639.71

0.08

0.03

0.01

0.01

105683.69

0.09

0.00

0.00

0.00

64381.22

0.08

0.00

0.00

LONG TERM DEBT

Year

Risk-free
Rate

Time to
Maturity

Market
Capitalization (in
Lakhs)

Value of
Debt

Value of
Firm

Volatility
of Stock
Price

Risk-free
Debt

2015

8.15%

2 6,03,224.00 98,667.00

6,08,603.00

54.93% 5,12,493.80

2014

9.44%

2 5,21,663.00 4,44,271.00

8,20,392.50

42.06% 4,31,911.97

2013

8.460%

2 5,33,612.00 1,31,174.00

4,67,584.00

36.95% 4,50,549.97

Current
Leverage

d1

d2

0.84

0.61

-0.17

0.27

0.57

0.53

1.38

0.78

0.08

0.96

0.33

-0.19

0.37

N(-d1)

N(-d2)

Riky Debt
(B*)

1,25,308.77

PD

R-r

3,87,185.02

0.22

0.57

0.14

0.22 24,622.97

4,07,289.00

0.12

0.22

0.03

0.58 86,341.52

3,64,208.44

0.19

0.58

0.11

4. Teaching approach and Methodology

In order to add maximum value, the class should follow structured approach while
working on this case study.
1. Give students this case study as homework with a set of questions for students
to consider. 1-2 questions on understanding of bond default calculations, and
2-3 questions on analysis of reasons of default and assessing the role of rating
agencies and regulators
2. Introduce the case briefly and provide some guidelines for how to approach it.
Clarify how you want students to think about the case. Break down the steps
you want students to take in analysing the case.
3. Create groups and monitor them to make sure everyone is involved. Small
groups can drift off track if you do not provide structure. Thus, it is a good
idea to make the task of the group very concrete and clear.
4. Have groups present their solutions/reasoning: If groups know they are
responsible for producing a decision, rationale and analysis to present to the
class, they will approach the discussion with greater focus and seriousness.
Write their conclusions on the board so that you can return to them in the
discussion that follows.
5. Ask questions for clarification and to move discussion to another level. As the
discussion unfolds, ask questions that call for students to examine their own
assumptions, substantiate their claims, provide illustrations, etc.
6. Synthesize issues raised. Be sure to bring the various strands of the discussion
back together at the end, so that students see what they have learned and take
those lessons with them. This can also be done by a group of student also. This
would in turn motivate them to pay more attention during the group.
Some variations on this general method include having students do outside research
(individually or in groups) to bring comparison of the actual outcome of a real-life
dilemma to the solutions generated in class.

5. Analysis
The case analysis involves understanding the role of rating agencies in the default. It
can be analysed from the case that how rating agencies could have given signals of
the default.
Amtek Auto is a very clear case of rating agencies having been caught napping on
their job. The agencies should have seen this default coming. But that did not turn out
to be the case.

Care Ratings suspended the rating of the company on August 7, 2015. Before
suspending the company Care had rated Amtek Auto at AA-. Care defines an AA
rating as: "Instruments with this rating are considered to have high degree of safety
regarding timely servicing of financial obligations. Such instruments carry very low
credit risk." Over and above the rating, Care also uses plus or minus for a certain level
of ratings. These signs "reflect the comparative standing within the category."
From a rating of AA-, Care stopped rating Amtek Auto. Another rating agency
Brickwork Ratings downgraded the debt of the company from a level of A+ to C-.
This was a downgrade of 12 levels in a single shot.
Brickwork defines an A rating as: "Instruments with this rating are considered to have
adequate degree of safety regarding timely servicing of financial obligations. Such
instruments carry low credit risk." It defines a C rating as: "Instruments with this
rating are considered to have very high risk of default regarding timely servicing of
financial
obligations."
It is worth asking to students that how did a company go from being categorised as
having an "adequate degree of safety" to a "very high risk of default," all at once. The
only possible explanation here is that the rating agency was caught napping or just
chose to look the other way.
In fact, Amtek Auto is not an isolated case. There have been other such instances as
well. As it was reported in a news-article in the Mint newspaper : "In the past one
year before default, there have been other instances where ratings have been cut
sharply by three notches or more in one revision. In July, CARE Ratings downgraded
Jaiprakash Associates Ltd by six notches from a rating of BB to D-, a rating that
reflects a default in the debt security. Non-convertible debentures of Bhushan Steel
Ltd also saw their rating drop by six notches following a revision by CARE Ratings in
December 2014. Punj Lloyd Ltd faced a similar drop in ratings in July."

Additional readings or references

https://www.fitchratings.com/web_content/product/methodology/eir_methodology.pdf
https://www.crisil.com/pdf/ratings/crisil-rating-default-study-2013.pdf
http://www.crisil.com/pdf/ratings/crisil-rating-default-study-2014.pdf
http://www.icra.in/Files/Articles/ICRA,%20Rating%20Transition.pdf
http://www.icra.in/Files/Articles/ICRA%20Rating%20Perf%202013-14-final.pdf
http://www.icra.in/Files/Articles/ICRA%20Rating%20perf%202012-13-final.pdf