Auto ancillary scrips in an overdrive

Stock prices of auto ancillary companies have shot up in the current fiscal year in line with the boom in the industry. These stocks have outperformed the Sensex - in many cases by a whopping margin.

The market capitalisation of Motor Industries, Sundaram Clayton, Exide Industries, Motherson Sumi Systems and Amtek Auto have risen by 307.28 per cent, 258.94 per cent, 299.72 per cent, 433.33 per cent and 138.03 per cent, respectively, between March 31, 2003 and December 22, 2003.

The market cap of Motor Industries increased to Rs 4,855.85 crore on December 22, 2003 from Rs 1,192.26 crore on March 31.

Similarly, Sundaram Clayton's market cap increased from Rs 350.95 crore to Rs 1,259.71 crore while that of Exide Industries has risen from Rs 263.51 crore to Rs 1,053.35 crore. The market cap of Motherson Sumi Systems zoomed up from Rs 178.52 crore to Rs 952.13 crore. Amtek Auto's market capitalisation increased from Rs 299.15 crore to Rs 712.07 crore.

It is the outsourcing story that is driving the boom in auto ancillary scrips? More and more global vehicle manufacturers are searching for low-cost suppliers from India for parts and components.

India, along with Mexico, China, Thailand and Brazil fit the bill for these original equipment manufacturers.

"The rally is driven by the expectation that India will emerge as the global export hub for auto components due to the 15 to 20 per cent cost advantage that it enjoys over the developed world," says Kalpesh Parekh, an analyst with multinational brokerage ASK Raymond James.

Indeed, many industry watchers opine that the auto ancillary sector will dwarf even the software and pharma sectors when it comes to exports. It is at least expected to match the 30 to 40 per cent export growth achieved by these sectors.

As to the issue of sustainability of the rally in these stocks, analysts say, ultimately it will depend largely on whether the export story really happens. Sure the story has begun, but it all depends on whether it continues.

"The critical factor in this (story) is going to be quality. Only if quality is maintained will the repeat orders come," says K Ramachandran, head of the advisory desk of BNP Paribas Private Banking.