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Amtek Auto: The Silo effect
Fund managers tell Forbes India that the problem with JP Morgan was that the debt team was not communicating with the equity team
Amtek Auto saw a lot of enthusiasm in the stock movement on Friday, November 20, for some time before closing at Rs 44.60 (down by 0.34 percent). For some time, the stock was up by two percent on news that SSG Capital, a vulture fund, had stepped forward to buy the debentures of Amtek Auto which were subscribed by JP Morgan Mutual fund. The company had failed to honour the debentures due to which the fund faced serious problems. It had to remove the Amtek debt investment from its schemes – JP Morgan India Short Term Income Fund (JSTI) and JP Morgan India Treasury Fund (JTF) - in such a way that one set of investment or portfolio had the Amtek Auto investment while the other did not have it.
The debenture issue was for a total of Rs 800 crore where Rs 600 crore was subscribed by banks, which according to reports, refused to look at Amtek as an NPA. On the other hand, the move from SSG Capital has come as a big saviour to all stakeholders.
Mutual funds in general had never invested in Amtek Auto, especially on the equity front. It was a stock that was clearly avoided by funds. “We had a problem with the management style of the company. Besides, the financials of Amtek Auto were always a question,” says a CIO of one of the big mutual funds in the country on condition of anonymity.
Amtek Auto had a return on capital employed of around 8.15 percent (Source: Cline) in 2008 which kept on going down over the years. A report on forensic accounting by Ambit Capital in December 2014 had spotted accounting anomalies in the balance sheet of the company. It was charging lower depreciation to its assets in spite of the fact that 90 percent of its assets were land and building. The same number was around 78 percent for its peers. The report also stated that there was volatility in the non-operating income of Amtek Auto. Investors were not happy with these findings.
The debt to equity ratio of the company was also not in the comfort zone. For the year ended June 30, 2008, it was 0.88:1 which increased to 1.46:1 by the end of September 30, 2014. Over the years, the debt went up by 22 percent annually while the net worth went up by 13.51 percent. One of the main problems with this lacklustre performance was the auto market itself which had not shown any growth for some time.
The stock of the company was considered to be very volatile. It had doubled after the market went into a rally when Narendra Modi was announced as the prime ministerial candidate in September 2013. Even if one would have purchased the stock in January 2014 at Rs 75, he/she would have seen it double in the next three months. By September 2014, the stock touched Rs 250 or gave a return of 231 percent in nine months. But professional fund managers in general stayed away from it. The stock later plummeted to Rs 30 by the middle of October 2015.
JP Morgan Mutual Fund was the only mutual fund that purchased the Amtek Auto debt from the secondary market. In August 2015, JSTI held 10.78 percent of its total corpus in Amtek Auto while JTF held 5.87 percent.
While the fund managers we spoke to didn’t want to come on record, they state that the problem with JP Morgan was that the debt team was not in communication with the equity team. “Anybody who is tracking the equity market in the auto segment knew that there were big problems with Amtek Auto. If the debt team was in communication with the auto team, such problems would never happen,” said a CIO. “Another problem is that the equity analysts are forward looking while debt analysts are backward looking and that creates all the problems,” he added.
In some mutual funds, there is a culture of working in silos. And as the funds start growing big, the communication between different teams comes to a standstill. The fund managers we spoke to had never ever invested into the equity as well as debt instruments of Amtek Auto because the feedback from the equity analysts was grim. In many cases, the debt fund managers were completely dependent on the equity analysts to understand new information about companies. This new information gets easily reflected into the share prices of stocks and is also available to everyone in the market. But that is not the case with debt markets. In most cases, debt as an instrument is very illiquid to trade and analysts are not in a position to value these instruments. So it becomes all the more necessary for them to be in touch with the equity analysts.
Nandkumar Surti, managing director and CEO of JP Morgan Asset Management Company, has decided not to discuss this issue with the press. But if you look at the volatility of the equity stock, it becomes clear that there were a lot of things that the equity stock was capturing on a regular basis. JP Morgan completely missed this basic clue and now has lost trust amongst its investors.
Gillian Tett, a journalist with the Financial Times, has written a book called The Silo Effect that deals with this phenomenon to a certain degree. The book talks about examples where people in different parts of the organisation refuse to talk with each other. The Guardian newspaper wrote that according to Tett, the financial crisis was caused both by a Silo effect of inadequate communication between department of giant banks, and by the mental silos that resulted into misclassifying credit instruments and by simply ignoring the tell-tale growth of what, after the fact, was vividly christened “the shadow banking system”.
The thoughts and opinions shared here are of the author.
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