Market players ready to take a ride on auto stocks

MUMBAI: After downgrading Indian automobile stocks in 2008, market players have started looking at them again. Manish Sonthalia, fund manager, portfolio management services, Motilal Oswal has automobiles in his preferred sector list.

Fund managers are also looking to add select auto stocks in their portfolio. Says Krishna Sanghvi, vice president-equity funds, Kotak Mahindra Mutual Fund, "We look to increase exposure in domestic driven stories, and automobile sector is one in the list."

The sector seems to offer opportunities and the downside risk seems to be limited going ahead, he adds.

Reserve Bank of India's efforts of facilitating lower interest rate scenario and sharp decline in commodity prices has raised hopes of revival in the sector. Amit Kasat and Rohan Korde of Anand Rathi expects demand to increase due to 200 basis points lower auto loan rates and margins to improve from Q4FY09.

However, within the automobile sector, market experts are positive on segments such as two-wheelers and passenger vehicles mainly due to comfort from the rural consumption. Stocks such as Bajaj Auto, Hero Honda Motors and Maruti Suzuki are the top picks. The year on year growth in January sales confirm the preference. For example, Hero Honda posted a 5.8% rise year on year in January sales after reporting a decline of 10.2% in December, flat growth of 0.5% in November and 3.4% fall in October. Similarly, Maruti Suzuki recorded a rise of 5.6 in January after witnessing a decline consecutively in three months before that.

Anand Rathi has a 'Buy' rating on the above three stocks in its report dated Feb 25 as these companies have strong cash flows, good return ratios, dominant market share and their capacity expansion plans are either completed or is nearing completion. CLSA also has upgraded Bajaj Auto from 'under performer' to 'out performer' in its report dated Feb 18 and Kotak Institutional Equities Research has upgraded Maruti from 'Sell' to 'Add' given reduced risks to earnings.