Fund managers trim exposure in auto stocks

Automobile stocks, despite their fair valuations, are losing sheen for mutual fund managers. A slowdown in sales, squeezing profit margins and macroeconomic woes, coupled with several company-related issues, have forced fund managers to cut their asset allocation in the sector.

Through the past three months, fund managers have reduced their exposure in the segment. In July, the exposure fell about 100 basis points to 4.2 per cent, the lowest in 11 months.

"Sales of commercial vehicles at Tata Motors are under pressure, while Maruti Suzuki is hit by an intermittent workers' strike and Bajaj Auto is facing hurdles in export markets," said the equity head of a large fund house, on condition of anonymity.

When Maruti's Manesar facility saw clashes between workers and the management on July 18, within nine months of a strike last year, the company's shares fell about 15 per cent in two to three days, owing to fears of production cuts. Bajaj Auto recorded poor sales in June, and the company stock tanked about 10 per cent in a span of a few trading sessions. Recently, however, both the stocks recovered from those lows.

According to Kaushik Dani, head of equities at Peerless Mutual Fund, "The automobile sector is a rate-sensitive one. There were expectations of interest rates softening, which did not happen, as inflation remained high. This did not prove good for the sector as a whole." Another sector seeing difficult times is capital goods. Fund managers have, for long, shied away from capital goods stocks, and rightly so. Barring Larsen & Toubro, it is hard to find other companies in the sector that are faring well. The sector, however, was once the favourite of fund managers. But the worsening macro-economic scenario, policy-related issues and shrinking order books have led to fund managers cutting their exposure to below three per cent of equity assets, compared with eight per cent around two years ago.

Now, funds are flowing into the pharmaceuticals sector. Of late, allocation in healthcare stocks has pipped that in the fast-moving consumer goods (FMCG) segment. Through the last four months, the pharmaceuticals sector has replaced FMCG as the third-most preferred bet for fund managers. "Pharma is an outsourcing story. And, the rupee's depreciation is proving beneficial for the sector," said Dani.

Sunil Singhania, head of equities at Reliance Mutual Fund, agrees. Earlier, talking to Business Standard, he had said he preferred not to invest in the FMCG sector. Valuations in the pharmaceuticals segment were better and the growth here was better, too, he had said. "FMCG has done phenomenally well. But, at 35 times the price-earnings ratio, should I buy FMCG, or should I wait? Our call is we should definitely look at sectors that might be better in the near term. We can return to the FMCG sector when the valuations are a little in our favour," he had added.

Many say the deficient rainfall may hit rural disposable income, and this wouldn't turn out to be good for non-durable consumer goods. "Already, the FMCG segment has had a good run; valuations were high," said Dani.