With a recovery in the domestic automobile sector now firmly established, auto ancillary stocks are back on the investment radar, most of whom have more than doubled from the lows in April.
In six months beginning April, shares of Bharat Forge Ltd have moved up from Rs100 to Rs288; Rane Madras Ltd from Rs57 to Rs112; MM Forgings Ltd from Rs43 to Rs72, Apollo Tyres Ltd from Rs18 to Rs52 and Amara Raja Batteries Ltd from Rs38 to Rs157.
The auto sector has grown at an impressive rate of 12% so far this calendar year and is expected to continue doing well in the medium term. While much of the incremental demand is from two-wheeler and passenger vehicles, even commercial vehicle sales have begun to look up. With truck and bus sales catching up in the past four months, it would result in greater revenue expansion as auto parts of these vehicles have higher value.
There’s good news on the export front, too. Recovery signals are evident in parts of Europe and the US, which is good news for large companies such as Bharat Forge, which have a strong presence in those regions.
The fact that many firms in the sector scaled down their expansion plans in the past two years will translate into better profitability for auto ancillary companies in the turnaround.
“Operating profit margins could expand by 100-200 basis points in the current fiscal (to 31 March),” says S. Krishna Kumar, vice-president (research) at Sundaram BNP Paribas Mutual Fund. One basis point is one-hundredth of a percentage point.
Margins had, after peaking at 15% in 2007-08, dipped sharply to 12% last fiscal, because of the double whammy of demand contraction and an increase in commodity prices. Forgings, castings and tyre manufacturers should see a greater improvement in profitability given the benefit of comparatively low base.
On the back of the expected positive news flow, auto ancillary stocks should do well in the near term, although the fact that most of these stocks have risen sharply would limit returns.
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