Fund managers trim exposure in auto stocks, dump capital goods

Pharmaceuticals replaces FMCG as third most preferred bet

Auto stocks, despite being at fair valuations, are losing favour with mutual fund managers. Slowdown in sales, squeezing profit margins and an uncomfortable macro situation coupled up with several company-related issues have forced fund managers to cut their asset allocation in the sector.

Over the past three months, fund managers have reduced their exposure by around 100 basis points (bps) to 4.2 per cent in July. This marks an 11-month low investment in auto companies.

"Sales of commercial vehicles at Tata Motors are under pressure while Maruti Suzuki gets disturbed by intermittent workers' strike and Bajaj Auto having troubles in its export markets," says equity head of a large-sized fund house who did not wish to be named.

When Maruti's Manesar unit, within nine months of last year's strike, was at trouble in July as workers' protest went violent, company's shares lost around 15 per cent of their values within a matter of 2-3 days fearing production cuts. Similarly, when Bajaj Auto came up with poor sales for June, the counter tanked around 10 per cent in a span of few trading sessions. Though both the counters smartly recovered from those lows recently.

According to Kaushik Dani, head of equities as Peerless Mutual Fund, "Auto is a rate-sensitive sector. There were expectations of softening in interest rates which did not happen as inflation remained high and did not prove good for the sector as a whole."

Another sector which is facing the brunt is capital goods. Fund managers have long been shying away from capital good stocks. And rightly so. Barring sector's giant Larsen & Toubro, it is hard to find other players in the sector which are doing well. The sector, once one of the top favourites of fund managers, no more enjoys the same preference.

The worsening macro-economic situation, policy related issues and shrinking order books have made fund managers cut their exposure to below 3 per cent of equity assets from 8 per cent around two years back.

Rather more and more money is flowing into pharmaceuticals. Of late, allocation in health care stocks have pipped the fast moving consumer goods (FMCG) segment. Rather, pharmaceutical has replaced FMCG as the third most preferable bet over the last four months.

"Pharma is an outsourcing story. And on the back of currency depreciation it is proving beneficial for the sector," adds Dani. Sunil Singhania, equity head at country's second largest fund house Reliance Mutual Fund agrees. Earlier talking to Business Standard, he had said that he was underweight on FMCG and would rather play pharma as valuations were in favour and growth was faster.

"FMCG, which has done phenomenally well. But at 35x (PE), whether I should buy FMCG or should I wait? Our call is we should definitely look at other sectors which might be better in near term and then we can come back to FMCG when the valuations are little bit in our favour," Singhania had added.

According to them deficient rains may impact rural disposable income which would not turn out to be good for consumer non-durables. "And already, FMCG has had a good run and valuations were quite high," adds Dani.