Portfolio managers are looking for value in midcap auto ancillary players.
This is one sector which has been continuously delivering handsome returns to investors over the past five years. And analysts say growth outlook for this sector continues to be robust.
Indian auto ancillary players have been riding on strong car sales as discretionary spend continues to grow in the economy at a rapid pace.
This has helped the stocks of firms engaged in a range of businesses like manufacture of gear, clutches, brakes, oil & oil filters, piston rings, shock absorbers and batteries to rally up to 1,270 per cent over the past five years.
Shares of LG Balakrishnan & Bros rallied to Rs 617.20 as of June 13, 2018 from Rs 45.10 on the same day in 2013. It means an investment of Rs 10,000 in the stock in 2013 would have become over Rs 1.35 lakh now. The company is engaged in manufacturing of chains, sprockets and metal-formed parts for automotive applications.
Jamna Auto has delivered over 1,000 per cent return during the same period, as the stock rose to Rs 92 from Rs 7.50. Rising disposable incomes in the economy and robust rural demand for automobiles will further boost bottom lines of these companies going forward.
Emkay Global Financial Services says the stage is set for double-digit growth in automotive demand due to an increase in government’s infrastructure spend, continuous focus on rural economy, higher disposable income and new launches.
Shares of JTEKT India, Steel Strips Wheels, Gabriel India, Hi-Tech Gears, Shivam Autotech, Frontier Springs, Rane (Madras) and IP Rings soared between 500 per cent and 1,000 per cent in last five years.
Motherson Sumi Systems jumped over five times. The company is among the top picks of Emkay Global Financial Services.
Among others, Samkrg Pistons & Rings, Wheels India, Bharat Gears, ZF Steering Gear (India), RACL Geartech, Sundaram Brake Linings, Shanti Gears, Setco Automotive, Amara Raja Batteries and Exide Industries also multiplied investor wealth during same period.
But most of these shares have since seen value erosion because of the massive selloff in midcap and smallcap segments, with some losing up to 50 per cent of value so far this year.
Going against the wind, LG Balakrishnan & Brothers, Steel Strips, Jamna Auto and Rane (Madras) are still trading with gains of 17 per cent, 14 per cent, 13 per cent and 5 per cent, respectively, for this calendar year.
Analysts are positive on the auto ancillary space despite the recent selling pressure.
“The auto ancillary space continues to look exciting and many of the companies have reported strong numbers,” Rajesh Kothari, Founder and Managing Director, AlfAccurate Advisors told ETNow in a chat.
Deepak Shenoy, Founder, Capital Mind, told ETNow that he remains bullish on the auto ancillary space.
“We have been buying stocks in smaller quantities and a large number of them are from the auto ancillary space. With the ancillary space, those focussed on the commercial vehicle segment looks very interesting,” he said.
Many of the auto and auto ancillary companies missed March quarter earnings estimates. Despite original equipment makers (OEM) across segments registering strong volume growth, margins slightly disappointed owing to commodity inflationary pressures, said brokerage Prabhudas Lilladher.
“A delay in pass-through of the commodity price rise hampered margin performance of ancillaries. While pressure is expected to continue in the near term, growth drivers like a normal monsoon forecast, pickup in infrastructure activities, a pickup in rural demand provide optimism for robust volume growth this financial year,” the brokerage said in a report.
Portfolio managers are looking for value in midcap auto ancillary players.
“The midcap ancillary category is going to benefit meaningfully because of regulation changes. That will mean a greater compliance by OEMs and the benefit of that will go to ancillaries. So, whoever plays into this benefit and more with technology are going to benefit meaningfully and those are the ones we are actually seeking to buy with the caveat that valuations have to be reasonable. That is how we are playing the auto and auto ancillary space,” Anshul Saigal of Kotak Mahindra Mutual Fund told ETNow.
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