As auto sector slows down, mutual funds bet on auto-ancillary stocks

MUMBAI: Domestic mutual fund managers have taken a fancy for the auto-ancillary industry as an alternative investment option in recent times as the auto sector has slowed down.

The mutual fund industry has deployed 2.46% of its total equity investments in this sector in August alone against 1.99% at the beginning of the current calendar year. This is the highest percentage investment made by the industry in this sector since January '11.

"The past few years have seen a stupendous sales growth in the auto sector which has created a healthy demand for replacement of auto parts today," says Gopal Agrawal, CIO, Mirae Asset Management. "Investment interest is especially high for companies catering to the replacement market like batteries and tyres," he added.

A fund manager from one of the leading mutual fund houses who did not wish to be named admitted that most of their auto sector holding is in the auto ancillary space. He, however, added that their stock picks like Bosch, Motherson SumiBSE -0.73 %, Amara Raja Batteries, ExideBSE -0.13 % and others are based on preference for these companies rather than anything to do with the sector.

Auto-ancillary companies like Sundaram Fasteners, SKF IndiaBSE -0.22 %, Motherson Sumi, Fag BearingsBSE 3.87 %, Exide and tyre makers like MRF and Goodyear have witnessed a rise in their institutional shareholding from March '11 to June '12 quarter. The shareholding, which includes investments made by FIIs and mutual funds, has increased to 21.12% from 18.9% for Sundram Fasteners, while in the case of Goodyear India, it has shot up to 8.46% from 5.74% in the past one year.



The auto-ancillary companies are holding firm in uncertain times and the industry has logged average sales growth of 30% in the past three quarters. Even though the demand from the original equipment manufacturers has dipped, the replacement market remains strong, which has helped these companies improve their operating margins to 20% from 15% over the past three quarters.

The possibility of margin expansion is also fuelling investment interest in the sector, as input cost pressures have begun to ease following the softening of commodity prices, says Agrawal.

Though sector performance is robust, high valuations may impact future investments. The 12-month trailing price-earnings multiple for the ET Auto Ancillary index stands at 21.19, pretty close to its 2007 peak of 25.29, hinting that the future growth may have already been priced in. However, if industry experts are to be believed, these valuations may be re-rated if margin expansion story plays out as anticipated.