MFs buy into auto

Two of five top picks for April are auto firms

Automobile companies have attracted fund manager interest in April, a month which saw the largest jump in car sales in 30 months. Passenger vehicles sales were up 16 per cent, while medium- and heavy-commercial vehicle sales saw robust growth of 25 per cent, as well. Fund managers picked up 6.7 million shares in Hero MotoCorp and 63.8 million shares in Tata Motors, showed an Edelweiss Fund Insight Report.

However, the top pick was Sun Pharmaceutical Industries. Despite a general trend towards exiting the pharma sector amongst DIIs (domestic institutional investors), mutual fund participation in a large block deal made Sun the most bought stock for asset managers in April. Last month, they more than doubled their holdings in the Dilip Shangvi-owned company, pumping in Rs 2,534 crore for 27 million new shares, taking their total holding to 47.18 mn, the most sought scrip in the month.

Axis Long Term Equity Fund, Reliance Pharma Fund, UTI Opportunities Fund, Birla Sun Life Frontline Equity Fund and SBI Pharma Fund each have 1.4-2.8 mn shares of Sun Pharma.

Late last month when minority shareholder Daiichi Sankyo offloaded its entire 8.93 per cent stake, the stock fell a little over eight per cent. The increased supply of 214 mn shares saw the stock come under pressure. More, the month saw steep volatility for the counter, a high of Rs 1,200 and a low of Rs 913. These dips were taken as good entry points by fund managers and they did not delay in doing so.

“A dip of nearly 25 per cent in the stock in a short span of time was a great opportunity. I understand the company might see headwinds when it comes to integration with Ranbaxy but we do not invest from a short-term perspective. I expect this investment to make reasonable return,” said an equity head of a large fund house, who wished not to be named. Compared with the sector's valuation, he said, the company was trading much lower and this should not be missed.

Sun’s management says it will deliver synergy of $250 million by 2018 through various operational efficiencies. The major hurdles are on account of Ranbaxy’s key manufacturing facilities in the country which cannot cater to the US market. Sun will look at monetising some of the recent Abbreviated New Drug Application filings of Ranbaxy from the latter’s Ohm facility in the US. This is the only one not under a consent decree, the term for an agreement to make various changes after violation of good manufacturing practices. Further, a complete resolution of the US drug regulator, the FDA's observations on Sun’s Halol (in Gujarat) facility is a key monitorable.

The extent of the challenges the company faces will probably be known over the next three to four quarters. If acquisition and production issues in the recent large acquisitions such as of Taro (legal) and Caraco Pharma (regulatory issues on manufacturing) and the time taken to solve these are anything to go by, it will take a couple of years for things to settle.