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Auto ancillary companies have been doing well of late. Let's see how their stocks are expected to perform in the near future.
Rahul Oberoi/Money Today | Print Edition: June 2014
Fast Forward
(Picture for representation only) Photo: Reuters

Shares of auto parts makers are on a roll. They have risen 24% on an average between January and April this year. This is welcome relief after a torrid 2013, when they had fallen 6% due to poor demand for automobiles because of the economic slowdown.

For instance, this year till April-end, JBM Auto and Amtek Auto shares rose 132% to Rs 155.64 and Rs 173, respectively. These were followed by Igarashi Motors India (up 108% to Rs 170.5), JMT Auto (up 82% to Rs 265.80), Sundaram-Clayton (up 78.5% to Rs 714.25) and Rane (Madras) (up 68.19% to Rs 218.65).

"The downturn in the Indian auto industry led to fall in capacity utilisation in 2013. The slowdown in Europe and the US in the first half of the year also hit the topline growth of auto ancillary companies (which are big exporters)," says Surjit Arora, research analyst, auto, Prabhudas Lilladher.

OUTLOOK AND VALUATION

The valuations look reasonable at this stage. Out of 80 auto ancillary stocks, the price-to-earnings, or PE, ratios of 63 are lower than the figure of 21.36 for the industry as a whole.

The PE ratio shows the price paid for a stock relative to earnings per share. It is used to value companies.

Experts are bullish on the sector for 2014-15. "The outlook is bright. An uptick in the domestic auto industry, besides a pick-up in replacement demand, will give a fillip to the auto ancillary industry," says Silky Jain, research analyst, Nirmal Bang Securities.

Prayesh Jain, vice president research, India Infoline, echoes Silky Jain. "The trend is expected to get stronger over the next one year as political stability emerges and global markets continue to recover from the financial crisis. Domestic revenues, too, will pick up from the second half of 2014-15."

FACTORS TO WATCH

"Factors to be considered while investing in auto ancillary companies are which segment they service and its growth prospects. A diversified customer base and wide geographical presence are preferable too. One must also look at the management's record and the company's valuation," says Jain of India Infoline.

Yaresh Kothari, analyst, automobile, Angel Broking, says, "The economic cycle is an important factor. One should invest at the start of an upswing in the economy and prefer companies that have a technological edge, good brands with pricing power, strong relationships with original equipment manufacturers and a diversified business model."

"Commodity prices and labour costs could play a big role," says Nikhil Kamath, director, Zerodha.

STOCKS YOU CAN BET ON

Motherson Sumi:

It is among the largest auto ancillary companies in India. It is part of one of the most diversified groups in the Indian automotive industry with a growing global presence. Its market capitalisation was Rs 22,361 crore on April 30, around Rs 10,600 crore less than that of Bosch, the market leader.

Motherson makes wiring harnesses and mirrors for passenger cars. It also supplies plastic components and modules to the automotive industry.

The company reported a net profit of Rs 353.76 crore for the quarter ended December 2013, up 260% from Rs 98.23 crore in the corresponding quarter a year ago. The stock had risen 38.89% to Rs 253 this year till April 30.

VK Vijayakumar, investment strategist, Geojit BNP Paribas Financial Services, says Motherson, with a high PE of 35, is richly valued. However, he says that it can be bought even at such a high valuation if one's horizon is 24 months or more. Otherwise, one can buy on declines. It is doing well in the export market too due to product quality and rupee fall. The stock can double in three years, says Vijaykumar.

"We expect better times for Motherson Sumi. It has already got orders to the tune of 4.3 billion euros. The stock can touch Rs 324 in the next 12 months," says Arora of Prabhudas Lilladher. On May 2, it was at Rs 263.95.

Amara Raja Batteries:

India's second-largest maker of lead acid batteries for automotive and industrial segments is a debt-free company. It had a net cash of Rs 300 crore as on March 2013.

The stock has risen 57.63% in the last one year. It was at Rs 409.85 on April 30 this year as against Rs 260 on 30 April 2013.

Profits have been rising at a decent pace. For the year ended March 2013, the company reported a net profit of Rs 286.71 crore as against Rs 215 crore in 2011-12 and Rs 148 crore in 2010-11.

Jain of Nirmal Bang Securities is positive on the stock. "Amara Raja Batteries is best placed to ride the demand for automotive and industrial batteries. Factors like cost-effective and world-class technology from global leader Johnson Controls, strong brands, growth-hungry management and fast-expanding distribution network are the key positives. As most capital expenditure is expected to be over soon, we can expect an improvement in the cash flow. We continue to believe that the stock will command a premium to competitors given the company's strong growth prospects."

"The company has been registering strong operating performance over the last two years led by widening reach, quality offerings and rising capacity. Consequently, it has narrowed the valuation gap with Exide, the market leader. We expect it to sustain this performance. The stock can touch Rs 440 in the next 12 months," says Kothari of Angel Broking. On May 2, it was at Rs 410.85.


Wabco India:

The company makes air brake actuation systems for commercial vehicles. It is one of the providers of electronic braking and stability, suspension and transmission control systems to the global commercial vehicle industry. Its markets include Australia, Malaysia, the UK, Singapore, South Asia, North America, Venezuela and the Middle East.

The stock rose 7.74% to Rs 2,209 this year till April 30. Rohan Korde, analyst, automobiles, Anand Rathi Institutional Research, says, "In the near term, the ongoing slowdown in demand for commercial vehicles and Wabco's heavy dependence on medium and heavy commercial vehicles, or M&HCVs, will weigh on profits. However, we are optimistic about the long term as it will be a key beneficiary of the recovery in demand for commercial vehicles, with rising exports adding to the positives. Wabco Holdings, the parent, wants make Wabco a research and development hub for global operations. The possibility of the government making anti-braking systems mandatory for all M&HCVs is an additional positive."

"Profitability is likely to grow at over 20% a year. We expect good cash generation over the next two years due to moderate capital expenditure. The stock can touch Rs 2,376 in the next few quarters," says Arora of Prabhudas Lilladher. On May 2, it was at Rs 2,150.

Gabriel India:

The company makes ride control products for passenger cars, utility vehicles, commercial vehicles and twowheelers. Its markets include Europe, Africa, Middle East, Asia Pacific, China, Russia and Far East.

Since January, the stock has risen 31%; it was at Rs 32.60 on April 30. Its PE ratio is 10.32. Korde of Anand Rathi says Gabriel is completely focused on innovation and productivity, besides reducing costs, working capital and overheads. It has also taken steps to improve the working capital cycle.

"Debt reduction is also a focus area for the company. Addition to the customer base, exports and steady replacement sales are future growth drivers. Despite lower vehicle demand, it has been able to sustain Ebitda margins of over 6%, which can be boosted further by operating leverage and higher contribution from more profitable segments such as exports and replacement. We believe it can give positive returns in the next few months," says Korde.

Ebitda, or operating profit, stands for earnings before interest, tax, depreciation and amortisation.

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