Auto Ancillaries

Auto ancillary stocks, as measured by the Auto Ancillary Index, lost 17% of their value in 2011. This is in comparison to a 24% fall in the Sensex. The index currently trades at price to earnings ratio of 18 times, which is expensive compared to the Sensex, which trades at 16 times. But there are a handful of stocks from the sector which are undervalued.

The auto ancillary industry reported a sales growth of 15.5% in the September 2011 quarter, but profit declined 12.5% year-on-year, and is likely to register a similar performance in the December 2011 quarter. Yet, there are a handful of companies which are likely to outperform and are currently cheap.

So far, Jamna Auto has already reported 57% and 63% of its March 2011 full-year sales and profit, indicating that the company is in a position to sustain its annual growth in sales of 30% and 55% in profits by the end of the year. The stock fell 40% in 2011 and currently trades at Rs 87, which is eight times their trailing 12 months earnings per share.

Fag Bearings India, which trades at 11.3 times its earnings and Sundram Fasteners, which trades at 9.9 times its earnings also appear cheap. But whereas Sundram Fasteners lost 22% through 2011, Fag Bearings gained 19.4%. Sales and profits of Fag Bearings have been growing at an average of over 25% and 45% over the past four quarters. In the first six months of the current fiscal, the company has already completed 62% and 74% of its last years sales and profit, and is therefore, in a firm position to sustain its growth rate.

Other auto ancillaries which posted positive annual returns were Amtek India, Bosch, Federal-Mogul Goetze, SKF India and WABCO India.

SKF India and WABCO India trade at 15.3 times and 15.9 times their earnings and are fairly valued, whereas Bosch and Federal-Mogul Goetze are expensive at 22 times and 30 times, despite firm expectations of earnings growth.

Amtek India’s sales have been growing at about 45% over the past four quarters while its profits have been doubling. Despite the 180% rise in its share price through 2011, its valuation is still not very high. At Rs 97, the stock is available at 19.3 times its earnings.

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