Financial Daily
from THE HINDU group of publications

Thursday, August 10, 2000



Markets | Next

Auto parts cos in reverse gear

Raghuvir Srinivasan

THE recovery in the market on Tuesday appears to be an ephemeral one restricted only to stocks from the information technology sector. There appears to be buying interest mainly for stocks from the `new economy'. Foreign institutional investors appear to be concentrating on information technology stocks which shed a lot of value in the last one month.

One sector that has fallen by the wayside in recent times is auto components. Stocks from this industry have taken a heavy beating and the market has not really differentiated between the frontline companies and the others in this industry. The decline h as been across-the-board with hardly any exceptions and the extent of fall has also been steep in the case of some stocks such as Sundram Fasteners and Sundaram Clayton.

Sundaram Clayton has seen an erosion of 25 per cent in its value in the last fortnight alone. In the same period, Sundram Fasteners has dropped by 12 per cent. Similarly, one of the sought after stocks from the industry, MICO, has dropped by 5 per cent w hile Swaraj Engines has lost a sharp 25 per cent in just two weeks of trading.

The others in the industry such as Sundaram Brake Linings, Ucal Fuel Systems, Subros and Perfect Circle Victor have also seen their values drop in the last one month.

There appear to be some fundamental worries over the earnings prospects for these companies atleast in the first half of this fiscal. The first quarter has seen either flat growth trends or a drop in the earnings performances of even major companies from the industry. The automobile industry, be it commercial vehicles or passenger cars, is in the grip of a slowdown. In fact, commercial vehicle sales were down by 7 per cent in the April-June 2000 period.

This has naturally caused a trickle-down effect on the offtake of components. Commercial vehicle and passenger car manufacturers have cut down their production to match the demand trends leading to reduced orders for the component manufacturers. The woes of component manufacturers have been compounded by the price squeeze employed by vehicle manufacturers who have refused to accommodate upward price revisions for components. In fact, vehicle manufacturers have been exerting pressure on suppliers to cut down prices to protect their own margins.

Besides, there has also been a visible slowdown in component exports as the first quarter numbers of prominent exporters such as Sundram Fasteners and Sundaram Brake Linings reveal.

MICO has been forced to operate on a five-day week following a build-up of inventory at its plants. In this backdrop, it is but natural that the market is running away from auto component stocks.

The immediate prospects for the industry appear uncertain at this point in time. It is still not evident whether the slowdown in automobile offtake is due to fundamental factors or because of the move towards uniform sales tax which has hiked the final c ost of commercial vehicles. But this may be a good time to pick up some excellent stocks such as Sundram Fasteners, Sundaram Brake Linings, MICO and Swaraj Engines at bargain prices.

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