Most South Indian auto ancillary stocks, high performers and consequently market favourites till recently, have now plummeted to their 52-week lows.Rane Brakelinings, once traded at over Rs 550, now quotes at a low of Rs 225. Rane (Madras) is at its 52-week low of Rs 255, after seeing a high of Rs 400. In the TVS group, Sundaram Clayton and Wheels India after bonus issues last year are also trading at their yearly lows of Rs 132 and Rs 200 respectively. A far cry from their respective highs of Rs 416 and Rs 650.

Ucal Fuel, at less under Rs 50 is trading at a third of its high in the last one year while Engine Valves slipped from Rs 593 to Rs 215. And the list doesn't stop there.

The reasons for this debacle are not far to seek. A perceptible slowdown in the growth of the automobile industry has knocked the wind out of ancillaries, which were already panting from their sprint in the last two to three years.

Although most ancillary scrips now trading at low P/Es, analysts are not bullish in the short term. They feel that the slide may continue in the next few months.

"Buy low and sell high", is probably the oldest stock market maxim. But, how low is low, is also the oldest question. Will these stocks, trading at their 52-week lows, make for profitable investments?

One reason for the bearish forecast is that no major increase in volumes or margins can be expected this year. "The industry will be lucky if it manages a growth of 8-10 per cent this year," an analyst said. "Telco's 1996-97 results may have exceeded expectations," he conceded, but pointed out that this industry leaders' vehicle sales in April and May have taken a beating.

One clear trend in the auto ancillary results has been a drastic fall in the second half performance. This can be attributed to two factors. One, most of these companies have invested heavily in the last two years in expanding capacities, sometimes borrowing at high interest rates. But the expected income from the expanded capacities has not flowed in. Consequently, higher interest and depreciation charges have stifled growth in the bottom line.

Also, some of these companies have increased their workforce in anticipation of increased volumes. This too has not materialised.

Secondly, most auto ancillary units absorb increase in costs in the first half and bargain for a price hike from their auto customers only in the second half. But last year, auto makers were in no mood to oblige. As a result there were very few price hikes. Those that were granted were merely to adjust for inflation. Even a company of the standing of Sundram Fasteners could not have its way.

According to analysts, the only consolation here was the fact that except aluminium, other metals like steel, iron copper were soft during the better part of the year.

Most analysts, however, rate most of these companies highly. The quality and integrity of the managements is good, they vouch. There have not been too many equity dilutions in the past and the shareholders' wealth has been on the rise.

So this brings us back to the same question. Is it time to buy ?

Not quite, most analysts feel. Wait and watch, is the strategy they recommend. Although auto ancillary stocks are attractively priced, they may not have bottomed out and may slide some more many opined. "Two to three months from now may be the right time to consider an entry", one analyst felt.

Prices are bound to fall another 5-10 per cent on announcement of the petro price hike, said another. That would be a good time to buy, but only selectively.

Else investors could wait for the first-half results to flow in. But if the automobile market picks up by August-September, as some expect, investors who wait, may miss the early part of the ensuing uptrend.

But how does one pick the right stocks? Go in for companies which have a diversified product and customer base recommends an analyst. At a time when it is difficult to predict the growth rates of the domestic auto industry, betting on companies with at least 20-30 per cent of sales coming from exports, would be a sound strategy, analysts feel.

Sundram Fasteners, Wheels India and IP Rings came out as the most favoured stocks among the analysts contacted. Sundram Fasteners is an exception to the downtrend in auto ancillary stocks. Despite a sluggish second half, the stock has been steady at over Rs 600. There have already been some unconfirmed reports of FII buying in the counter.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.