Auto stocks losing favour

The latest signs of weakness in automobile stocks have not gone down well with fund managers, a section of whom is willing to stay away from the auto sector, at least for the time being.

However, some managers are hoping that a further weakening in valuations will give investors a chance to invest in good stocks at more reasonable levels.

Auto stocks have lately been on the backfoot, especially after the last quarterly results, which, according to investment circles, have not quite been in line with expectations for a number of companies. In fact, not all players have managed to return to the market's radar after the last crash in May 2006, they added.

The sector was perceptibly depressed last year, it is pointed out, a trend evident from the performance of the BSE's auto index for that period. The auto index, which was at 4,576.52 on June 19, 2006 has crawled to only 4,633.97 on June 18, 2007. On the other hand, the BSE Sensex posted a sharp return of 43 per cent during this period.

The current situation, sources said, is quite different from what was witnessed in 2005, when auto stocks added considerably to investors' wealth.

Pare exposures

The top-performing funds of the day now have only a low-to-medium exposure to auto.

Most have scaled down exposure in recent times.

These include ICICI Prudential Services (73 per cent returns for the one-year period ended June 18), Standard Chartered Premier Equity (70 per cent) and DBS Cholamandalam Opportunities (67 per cent). Auto accounted for only 4.55 per cent, 1.74 per cent and 6.04 per cent of their net assets respectively as on May 31, 2007.

The way forward, according to some quarters, may well lie in well-chosen mid-cap stocks, as opposed to strictly large-cap names such as Maruti, Bajaj Auto and Tata Motors, which are key components of the Nifty. "A host of mid-cap names are available in the auto/auto component segment," said a fund industry source.

"Clearly, not all are worth investing in. However, fund managers may consider building diversified portfolios with a bias towards mid-caps." He also said investors must see whether they can enter good stocks when prices soften further. According to him, the following should drive further allocations: global outsourcing opportunities for auto ancillary companies, demand witnessed in specific sub-sectors such as tractors and two-wheelers and recent reduction in Customs duties on polymers.

How auto funds stack up

There seems to be a major difference in the performance of the two auto sector funds, one managed by UTI and the other by JM.

While the JM fund has provided 27.76 per cent for the one-year period ended June 18, the UTI product has in comparison given a disappointing 1.16 per cent, according to data released by Value Research.

These render the one-year average at 14.46 per cent. Both, incidentally, were launched in 2004.

The funds in question seem to follow different styles. JM has, in recent times, relied heavily on such mid-cap names as Ramkrishna Forgings, Amtek and Ashok Leyland. UTI, on the other hand, has invested heavily in M&M, Tata Motors, Maruti and Bajaj Auto. Auto sector funds (in terms of one-year returns) are positioned well below other sectoral products such as bank (70 per cent), IT (69 per cent), pharma (35 per cent) and FMCG (15 per cent).