Auto ancillary stocks have seen a significant decline in the calendar year 2019 (CY19) with some of the names tumbling up to nearly 60 per cent. The fall comes on the back of an overall economic slowdown, which has impacted the entire auto segment.
For instance, volumes have been weak in May 2019 for most auto-makers, with declines for Tata Motors (-38 per cent yoy) and Maruti Suzuki (-24 per cent). In comparison, Mahindra & Mahindra (M&M) recorded a flat performance (-0.5 per cent), supported by new products, reports suggest.
As regards auto ancillaries, experts caution that there is more pain ahead, given the myriad challenges that are plaguing the sector such as low demand amid weak rural economy, migration to BS VI vehicles and government policy on electric vehicles.
A FLOP SHOW
The markets, too, have been taking cognizance of the developments. Over 25 companies in the auto ancillary space have corrected 30 per cent or more this year. Among the prominent ones, JMT Auto (down 55 per cent), Setco Automotive (47 per cent), Pricol (41 per cent), Jay Bharat Maruti (37 per cent), Motherson Sumi (25 per cent), Jamna Auto Industries (18 per cent) have seen a sharp decline on a year-to-date (YTD) basis.
The prevailing liquidity crunch, especially in the NBFC space, has had a serious impact on the automobile demand, which has also been under pressure due to the rise in insurance and fuel costs. The latest downgrades of various NBFCs dented the liquidity in the NBFC/banking system. As a fallout of the drop in automobile demand, inventory levels at the dealer level have been rising, thereby leading to production cuts by auto manufacturers.
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THE ROAD AHEAD
The auto industry, including the auto ancillaries, is not out of the woods yet, feel analysts. Migration from BS IV to BS VI norms and the government policy on electric vehicles and components are likely to impact sentiment going ahead, they say. That said, all is not lost. A good monsoon and an improvement in the liquidity situation in the banking system can help turn around the sector’s fortunes.
“Being interest rate sensitive, the recent rate cuts by the Reserve Bank of India (RBI) would be positive for the sector, but it needs to be seen how long does it take for the banks to pass on the same to customers given the liquidity tightness in the market. The sector is likely to undergo time correction until positive news emanates on the improvement in liquidity state of the banking system,” suggests Arun Thukral, managing director and chief executive at Axis Securities.
INVESTMENT STRATEGIES
Arun Agarwal, an auto analyst with Kotak Securities suggests companies with a strong balance-sheet, which can tide over the current slowdown.
“Further, one needs to assess the exposure of these auto ancillary companies to different segments i.e. two-wheelers, passenger vehicles (PVs), commercial vehicles (CVs), tractor makers, etc. That’s because there might be segments where the pain is likely to continue and some segments where recovery is seen soon,” he says.
Analysts also advise investors keep a tab on dependence of auto companies on OEMs (original equipment manufacturers) and the replacement market. Besides, valuation of the companies should also be taken into consideration before investing in these stocks.
Gaurang Shah, Head Investment Strategist at Geojit Financial Services says government policy on electric vehicles and related components will clear a lot of uncertainties and help in taking an informed decision.
“For instance, batteries as a component, will go into an electric vehicles as well. So, companies such as Exide Industries, Amara Raja Batteries will benefit from the government’s push. Bosch may also be considered as they deal in components such as lights and brake systems, batteries,” Shah of Geojit says.
Mitul Shah, an auto analyst, with Reliance Securities expects a further downside (up to 10 per cent) in these stocks despite the underperformance seen on YTD basis. “Wait for some clarity on monsoon, rural economy and rate cuts before investing in auto ancillaries,” he advises.
| ON A ROCKY TERRAIN | ||
| Entity | Price (Rs) | Change (%) |
| JMT Auto | 1.69 | -54.8 |
| Setco Automotive | 18.80 | -47.0 |
| Pricol | 29.75 | -40.8 |
| Jay Bharat Maruti | 202.00 | -36.5 |
| GNA Axles | 266.50 | -26.2 |
| Motherson Sumi Systems | 125.25 | -24.9 |
| Menon Pistons | 18.00 | -18.2 |
| Jamna Auto Industries | 53.15 | -18.1 |
| S&P Bse Auto | 17552.93 | -15.7 |
| Rico Auto Industries | 60.45 | -14.9 |
| S&P Bse Midcap | 14443.05 | -6.4 |
| S&P Bse Smallcap | 13919.11 | -5.4 |
| S&P Bse Sensex | 39112.74 | 8.4 |
| RACL Geartech | 72.90 | 22.0 |
| Data source: ACE Equity | ||
| Price on BSE as on June 19; Change is YTD | ||