After multi-bagger returns over 5 years, auto ancillaries slip; should you buy?

NEW DELHI: Auto ancillary stocks, companies that supply equipment and other products to automakers, have slipped up to 27 per cent so far this year.

But, that’s not deterring experts from going bullish on them.

Stocks of these companies are among the stories on Dalal Street in the past 3-5 years with returns ranging from 70 per cent to 500 per cent, which made them clear value generators for stock investors.

Calendar 2016, though, hasn’t been rosy for them, as many of these stocks have corrected throughout the first four months of the year or have delivered flat returns.



Vivek Mahajan of Aditya Birla Money is more bullish on auto ancillary than on auto despite the downturn.

“Definitely, we have seen a lot of activity as far as the auto space is concerned, but we are more bullish on auto ancillary than auto,” he said.

One of the reasons for the bullishness is the turnaround that the auto industry as a whole is witnessing over and above the good news flow. That, without taking into account the benefits that the seventh Pay Commission and OROP stimulus promise.

Automakers, who are chief buyers of auto ancillary companies, are witnessing a revival in consumption demand, especially in the commercial and passenger vehicles space.

Over and above this, news of a good monsoon this year also raises hope of a further push to volumes from the rise in rural consumption.

“If monsoon rains are good and the seventh Pay Commission recommendations come through over the next few months, you can expect some uptick in volumes, specifically in the auto, auto ancillary segments,” said Mayuresh Joshi, Fund Manager, Angel Broking.

Sridhar Sivaram, Investment Director at Enam Holdings, believes the auto ancillary sector has had its run and it’s time for correction in the short term.

“I think auto ancillaries have had a huge run so far. If we take the last three-four years, they have been multi-baggers. So, they are facing multiple headwinds right now,” he said.

But, he hasn’t given up hope on them yet and suggests that these stocks can provide investors with reasonable returns over the next three to five years.

“If you take a three-to-four year call, it is possible that they will deliver reasonable returns. You can pick five or six companies from across sectors. Some of these companies have well integrated international businesses. I would still give the benefit of doubt to the managements and stay invested,” he said.

Here are top stock ideas from this sector:

Jamna Auto: Vivek Mahajan considers Jamna Auto to be a pure play on the commercial vehicle cycle recovery and sees good upside in the stock.

“Pure CV play will be Jamna Auto quoting at some 140-142 looks good,” he said.

The stock has given flat returns for the year so far but is trading with a price-to-earnings (PE) multiple of 18.82 and price-to-book (PB) of 2.83 times.

“We believe that Jamna Auto will do well because the CV and MHCV markets are doing well,” said Sandeep Raina, Deputy Vice President, Edelweiss.

Amara Raja: This stock has seen an upside of 10 per cent in the year so far and is Vivek Mahajan’s second preferred bet in the segment.

The stock trades with a PE multiple of 33.8 and PB value of 9.6. “Amara Raja Batteries should deliver very good numbers in the foreseeable future and is our preferred bet at current level. Any correction in the stock should be used as a buying opportunity,” Mahajan said.

WABCO India: “Wabco is a pure CV bet and has got more than 80 per cent market share in domestic market. This stock should consolidate between Rs 5,700-5,900 or before it starts its upward trajectory,” said Vivek Mahajan.

The stock has climbed 7 per cent do far this year and is trading with PE multiple of 61.89 and a book value of 12.75 times.

The stock has gone under correction over royalty payment issues to the parent company which Mehraboon Irani, Principal& Head - PCG Business, Nirmal Bang Securities believes a buying opportunity.

“I think for people who do not own the shares this could turn out to be a buying opportunity for the longer term. We have worked on this company, and I, personally, feel the stock could be a five figure stock over the next two-three years,” he said.