28 Sep 2015 19:30 IST

Where to apply the brakes

Tread with care on two-wheelers and overheated MNC stocks

While the auto and auto components space still presents a lot of buying opportunities, there are a few pockets where prospects aren’t as rosy.

Motorcycles, whose volumes growth is going in reverse gear, is one such segment. After showing a 4 per cent volume growth in 2013-14 (over the previous year), volume growth in 2014-15 dropped to 2.5 per cent.

In the first five months of this fiscal, motorcycle volumes have shrunk 4.3 per cent compared to the same period a year ago.

With a good chunk of motorcycle sales coming from rural areas, the collapse of rural consumption has taken a toll on sales. A moderation in crop prices and petering out of non-farm income from schemes such as the MGNREGS have impacted rural income in recent times. Not-so-good monsoons, lower harvests along with minimal hikes in MSPs could further dampen agricultural income.

Preliminary estimates already indicate that foodgrain production this kharif season could be 1.8 per cent lower than last year due to rainfall deficiency.

Hence, the pain is here to stay for motorcycle manufacturers such as Hero MotoCorp, Bajaj Auto and TVS Motors.

This implies that one needs to think twice before entering stocks such as Munjal Showa, Minda Industries, TVS Tyres, and Falcon Tyres, which have more exposure to the two-wheeler segment. An off-colour rural segment would also mean weak prospects for tractor manufacturers/suppliers, such as Escorts, Mahindra and Mahindra and Swaraj Engines.

Overheated stocks

Then, there are a set of stocks such as the MNC component players, which have seen their valuations expand hugely.

Technological superiority, low leverage or debt-free status and high margins of MNC component makers have seen the market reward them handsomely since this rally began in September 2013. Take Wabco India, the market leader in air and air-assisted brake systems for commercial vehicles.

While the stock price has moved from about ₹1,600 two years ago to around ₹6,900 now, its trailing 12-month PE in this period has inched up from 25 times two years ago to a dizzying 97 times now.

Low float has also contributed to the sharp gains.

Though Bosch, a supplier of fuel injection systems for diesel engines, has corrected about 20 per cent in the market volatility of the last six months, its PE still stands at 61 times, compared to the 76 times it traded at during the March 2015 peak of the Sensex.

Cummins, a maker of diesel engines, is another which trades at 39 times currently. Timken India’s trailing valuations have expanded from 21 times two years ago to 51 times now.

There are desi ones too, such as Automotive Axles, Mahindra CIE, Wheels India and Eicher Motors whose valuations have expanded. Though many of these companies have seen healthy earnings growth, stock prices have moved much farther ahead.

Troubled ones

Finally, steer clear of highly leveraged plays like Amtek Auto and its group company Castex Technologies (formerly Amtek India).

The stock has been in trouble since mid-June when it was reported that it was facing a liquidity crunch and inability to service its debt (about ₹17,600 crore for the Amtek group as of March 2015). In the recent June 2015 quarter, Amtek Auto posted a loss of ₹157 crore, with interest costs doubling over the year-ago period.

Rating agencies downgraded the company’s debt after this. Group company Castex Technologies was accused of artificially pushing up its stock price to trigger a clause that permitted compulsory conversion of its FCCBs into equity.

Amtek Auto has so far been unable to repay about ₹800 crore of debt that was due last week.

While the company is trying various means to raise cash to meet its obligations, its fate remains unclear.

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