Ancillary units beat auto makers on bourses

Ceat, Amara Raja, MRF stocks gain 50-190%; Maruti, Tata Motors & Hero MotoCorp shares see sub-20% rise

This year, automobile ancillary stocks have performed far better than those of mainstream auto companies. Not only did these outperform the auto index, but also did exceedingly well compared to the benchmark indices.

Thanks to the surge in replacement demand, lower raw material prices and the substantial pick-up in exports, auto ancillary companies turned out to be a major wealth creator for investors this year. Tyre makers and battery manufacturers were among the main outperformers. The Ceat stock price nearly trebled — from Rs 105 to Rs 308, while shares of Amara Raja Battery, the emerging star in the battery business, jumped from Rs 238 to Rs 357.

At a time when automobile giants such as Tata Motors, Hero MotoCorp and Maruti Suzuki gained between nine per cent and 20 per cent on the stock exchanges, Ceat, Amara Raja Batteries, MRF and Motherson Sumi returned up to 190 per cent. While the BSE auto index delivered meagre six per cent returns, the 30-stock Sensex gained 6.6 per cent.

Gopal Agrawal, chief investment officer, Mirae Asset, says, “Auto ancillaries did very well. The tyre industry was the beneficiary of a substantial correction in rubber prices, which helped margins. Also, replacement demand strongly supported thee companies, which improved volume growth. Higher exports helped, too.”

For the last few quarters, Amara Raja Batteries has been the talk of the Street. Now, Ceat has also surprised the markets with its quarterly results.

For long, equity fund managers have maintained a bullish outlook on the auto ancillary space. Their exposure to auto ancillaries was almost half of what they had pumped into the mainstream automobile sector. Several of India’s equity schemes have allocations of up to five per cent of their assets in Amara Raja, while tyre major Ceat accounts for five-eight per cent of the assets of some equity schemes.

Navneet Munot, chief investment officer at SBI Mutual Fund, says, “We have a lot of auto ancillary in our portfolio. We have been bullish on replacement demand. Some of these companies have done very well.” For the majority of this year, auto sales in the two-wheeler and commercial vehicle segments remained under pressure. But this did not impact auto part-manufacturing companies.

Shares of Bajaj Auto are trading at a discount of 11 per cent compared to last year, while those of commercial vehicle maker Ashok Leyland have seen a steep decline on the bourses, with 40 per cent of the value being eroded. Shares of Mahindra & Mahindra gained 75 basis points, while India’s largest two-wheeler company, Hero MotoCorp, rose 10 per cent.