Quietly, Mkt Is Betting On Auto Parts As The Next Pot Of Gold

New Delhi, May 17: | Updated: May 18 2003, 05:30am hrs
Hopes of the country becoming a major outsourcing hub for automobile components have flared up the auto ancillaries stocks, taking them to one-year highs. Riding high on their export potential, but without much of a noise, these stocks have zoomed up to 135 per cent since the beginning of April. Ucal Fuel Systems and Rane Engines have, in fact, touched all-time highs.

A delegation representing top 33 domestic auto ancillary manufacturers are currently in the United States to hold high-level talks with the American auto majors.

Industry sources, fund managers and brokers are upbeat on the huge export potential of these companies which are already supplying components to leading global original equipment manufacturers like Ford, General Motors, Fiat, Volvo and Delphi.

Automotive Component Manufacturers Association of India executive director Vishnu Mathur says the industry body expects the auto ancillaries exports to touch $1 billion (about Rs 4,700 crore) during the current fiscal as against the last years $800 million, a growth of 25 per cent over fiscal 2002.

Auto ancillaries companies like Bharat Forge, Motherson Sumi Systems, Sona Koyo Steerings, Gabriel India, Exide Industries, Sundaram Clayton, Kirloskar Oil Engines, Cummins India, MICO, Sundaram Fastners, Automotive Axles and Jay Bharat Maruti have touched their new 52-week highs. These stocks have posted gains between 23-135 per cent during the one-and-a-half month period. The sharp spurt in prices is backed by a jump in volumes, reflecting the buying interest on the bourses.

Earlier, liquidity in these stocks had been a concern and was preventing big ticket investors from betting on them. However, the volumes have spurted in since the beginning of May. This was the period when the stocks actually soared to new highs.

Ten major counters, including Cummins India, MICO, Motherson Sumi Systems and Bharat Forge, have created investor wealth worth Rs 1,700 crore during the one-and-a-half month period since April 1.

Fund managers say plans of several global auto majors to make the country an export base should help the domestic component manufacturers who are popularly known as follow sources of original equipment manufacturers.

India could well become an outsourcing hub for global auto manufacturers and the country stands a good chance against China. I feel that most of the domestic auto ancillaries companies have come of age and some of them have been supplying components to leading global car manufacturers, says Sundaram Mutual Fund managing director TP Raman.

While the domestic auto ancillaries industry is not only playing the low price card, it has also become a global leader in making quality components. Our strength is that we are now a global leader in quality and are capable in supplying value-added products at competitive prices. Indian companies are now into design and development besides manufacture, says Mr Mathur.

To meet global quality standards and reach critical mass, some companies have already started investing in their facilities. The Indian companies have been investing in their manufacturing facilities to upgrade themselves to meet global standards. While they are capable of supplying high quality components, they can also sell them at competitive prices, says Raman of Sundaram MF. Nevertheless, he adds its only a beginning and it will take a couple of years to realise the full export potential.

Large American and European companies are looking at India in a big way. The Indian companies are able to match their quality requirements and can supply products at a very low cost. Low wages coupled with low interest rates are giving these companies an advantage over others. Recently, Bharat Forge declared a 600 per cent spurt in exports, says a fund source.

The optimism in the market about these stocks does not appear misplaced. There is a real momentum in exports. The difference now is that while the Indian industry had been supplying to spare part manufacturers earlier, now it is directly supplying to original equipment manufacturers. This leads to higher margins and long-term global linkages and sustained orders, says Mr Mathur.

Fund sources admit that these stocks hitherto not showing major activities are now being re-rated. The market is expecting at least $1.5 billion from exports by auto ancillary companies. This will ensure a big jump in their earnings and the market is now re-rating these stocks, says Taurus Mutual Fund CEO RK Gupta.

According to Indiabulls equity analyst Dinesh Chandel, there is a buying interest in the mid-cap stocks at the moment as money getting out of technology stocks is finding its way into these counters.

Many ancillary stocks are still trading at very low price to earning multiples. As on May 15, Goetze India closed at a PE of 5.8, Munjal Showa enjoyed a PE of 5, Omax Auto at a PE of 5.5 and Gabriel India stock traded at a PE of 6.2.

Motherson Sumi Systems emerged as the top gainer among auto ancillary majors with 135 per cent gains since its close on April 1. As against a price of Rs 57.05 then, the stock closed at Rs 134.2 on May 16. Reports suggest the company has bagged a big export order from a global auto major. The stock currently enjoys a comparatively higher price to earning multiple of 19.7.

Sona Koyo Steerings zoomed over 84 per cent during the period to close at Rs 105 on May 16 as against Rs 57 on April 1, while Goetze India spurted 58.45 per cent during the period to end at Rs 28.6.

Clutch Auto, Rico Auto, Ucal Fuel Systems, IP Rings, Exide Industries, Gabriel India and Sundaram Clayton are the other major gainers surging 50-115 per cent during the period.

Kirloskar Oil Engines, Hi-Tech Gears, Munjal Showa and Omax Auto, besides Cummins, MICO and Bharat Forge, are the other major gainers during the period. These counters have gained 23-43 per cent since April 2003.