Auto sector stocks: A mixed bag

R. Y. Narayanan Coimbatore | Updated on January 01, 2013

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The auto sector presents a picture of paradox with frontline auto stocks gaining 50 per cent or more in 2012 even as shares of auto component manufacturers have shed value. This has happened though the component manufacturers enjoy some cushion such as strong after-sales and export markets.

The size of the Indian auto component industry is huge. According to the Automotive Component Manufacturers Association of India (ACMA), the industry's turnover last fiscal was a staggering Rs 2,10,400 crore ($43.4 billion), a growth of 15.7 per cent over the previous year (in rupee terms). Its CAGR over the past 5 years has been 19 per cent and ACMA estimates that by 2020, it should be a $115- billion industry. This includes both ACMA members and non-members and from the unorganised sector too.

Shares of some of the major automotive players such as Eicher Motors, Maruti Suzuki, Bajaj Auto and Mahindra & Mahindra have touched fresh 52-week highs, gaining 50 per cent over a year, and in case of Eicher, doubling over a year.

Tata Motors on Monday closed at Rs 313 (all share price data pertains to NSE), which is near its 52-week high of Rs 320.75 it had touched in April last year. In fact, the stock has been keeping steady despite market turbulence for a year.

Contrast this with stocks of some of the major auto component manufacturers.

Amtek Auto is down from a yearly high of Rs 146.70 (February 2012) to Rs 88.10 on December 31, 2012, and Bharat Forge has shed more than Rs 100 from its 52-week high of Rs 358.40 in May last year to Rs 252 levels now. Some of the major players in this sector such as Automotive Axles, Coimbatore-based LGB and Pricol, Chennai-based three Rane group companies— Rane Madras, Rane Brake Lining and Rane Engine Valve, and Z.F. Steering Gear—have all shed significant value.

The travails of the auto component sector are exemplified by Hinduja Foundries, a leader in the automotive casting sector. Despite its strong parentage, the management had to withdraw the Rs 125 crore rights issue in 2012 due to falling share price and now it has to be referred to BIFR for statutory reasons though the promoters have assured that they would not allow the company to go sick. The stock, which fell to its 52-week low of Rs 44 on Friday, recovered to close at Rs 50 on Monday.

However, stocks of tyre and battery manufacturers are thriving in an otherwise gloomy scenario for the auto component industry. MRF's  shares roared to a fresh 52-week high of Rs 13,019.95 on Tuesday and in a year the stock has galloped from a low of Rs 6,871.10 (January 2, 2012) to the current levels. Apollo Tyres and JK Tyre have made significant gains over a year and battery makers Exide and Amara Raja Batteries also are shining on investor interest.

Explaining the reasons for the market paradox, Sunil Shah, Head- Research, Axis Securities, Mumbai, said within the auto sector, there are sub-sectors like passenger cars, 2- wheelers and CVs. OEMs want to keep the cost under control due to intense competition which has hit most of the auto ancillary companies because of  “compression of operating profitability”, despite sales volume. He said in this business “there is high operating leverage; so bottomline gets affected and while OEMs are making new highs, the ancillaries have under-performed”.  

On whether the auto component industry should diversify into other areas such as Defence, railways, aero space and farm implements as ACMA President Surinder Kanwar had suggested to sustain growth, Sunil Shah agreed with it and pointed out that companies like Commercial Engineers Body Building Ltd (CEBBCO) was diversifying its product bouquet to add Defence and railways products as well as the business principles remained the same-which was specialised engineering products.

Asked about the threat posed by signing of FTAs to domestic auto component makers, he said Indian auto companies were looking at exports as the next big area of growth and would benefit from increased sales in the global markets. Putting a curb on foreign auto components might pose a hurdle in the sale of car itself, “which is not a win-win situation”. If the cost benefit of a particular product was in favour of Indian manufacturer, the shift has to happen and cited the sharp decline in the percentage of imported components that Maurti now uses compared to the 1990s.   

On how the stocks of tyre and battery makers seemed to have weathered the storm while auto component makers' shares have taken a beating, Sunil Shah said the tyre companies went through a bad patch in FY2010 because of rising rubber prices. The scenario has improved significantly since then, rubber prices have softened and the pick up in auto demand has provided these companies with significant operating leverage which was the prime reason for their outperforming other component producers' shares.

Asked whether the vehicle manufacturing companies' stocks were overvalued or not, he said auto companies need to be looked into category-wise. While stocks such as Maruti and Bajaj Auto have run up (steeply), they should be looked into for investing on declines. Stocks such as Tata Motors and Ashok Leyland could be invested on reversal of interest rate cycle. But Hero MotoCorp and TVS Motors were losing ground to Honda Motorcycle & Scooter India Pvt. Ltd and “can be avoided”, he said.

Published on January 01, 2013

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