Positive on Maruti; like Amara Raja, Apollo Tyres: Centrum

Yesterday, Maruti Suzuki India resumed production at its Manesar plant. In an interview to CNBC-TV18, Ajay Shethiya, Centrum says, he continues to remain positive on the stock.

He sees gradual progression in monthly production at Manesar. "It is not going to happen in immediate terms or not be scaled up at the peak levels in few days. But over a period of time, they will be able to achieve the normal production. The overhang in terms of production at Manesar plant is being addressed now," he adds. In the auto ancillaries sector, he likes Amara Raja Batteries. In the tyre space, he is betting on Apollo Tyres. He further says, he would prefer Motherson Sumi Systems over Gabriel India. Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Ekta Batra. Also watch the accompanying video. Q: As a category are auto ancillaries interesting for you? A: It is important to look at the sub-sectors of auto ancillary. I think the two sectors, which have done quite well, are battery and tyres. The characteristic for both the sectors is that a significant pool from the replacement demand. For OEM, the growth rate has been slightly on the moderate side. But since most of the companies like Apollo Tyres or Amara Raja or Exide are present in the replacement market, it is a high margin business. At the same time, the growth rate would be much better as compared to what OEMs have been registering. That is something that is helping out. Also, the rubber prices have come down significantly from your earlier peak levels. That is again benefiting them. Q: Stocks like Autoline, Shanthi Gears and today Gabriel India they are not in the category, which you mentioned, batteries and tyres where replacement demand would be good. These would be largely OEM guys, isn’t it? Is there any reason why other auto ancillary stocks not servicing the OEM category would also be rising? Is there any thing to propel some of them? A: Specifically I can’t comment on Autoline Industries and Shanthi Gears because that is something not in our coverage of stocks. But as far as Gabriel is concerned, the space is largely into the shock observers where you have got two players, Munjal Showa and Gabriel. Gabriel is largely present in the replacement market as compared to Munjal Showa where it is largely focused towards the OEM segment. If you see the two stocks, within the shock observer category, Gabriel has got a significant exposure towards the replacement market. Q: How exactly would you be placed on Maruti at this point or do you think there is basically an overhang with regards to labour problems that is going to continue on the stock? A: What was holding back was the production disruption at Manesar plant. From yesterday, they have employed 300 employees and they have started producing about 150 cars a day. If you see last year when there was an issue in terms of production at Manesar, the production was ramped up from 150 units per day to around 600 to 700 units per day in a span of around 20 days. I see gradual progression in monthly production at Manesar. It is not going to happen in immediate terms or not be scaled up at the peak levels in few days. But over a period of time, they will be able to achieve the normal production. We continue to remain positive on the stock. The overhang in terms of production at Manesar plant is being addressed now. _PAGEBREAK_ Q: The other stock, which seems to be a bit concerning, is Ashok Leyland. It is currently at around Rs 22. It is possible an underperformer in the auto space. What exactly is plaguing Ashok Leyland? How exactly would you be placed on it? A: In terms of industry, it is into the commercial vehicle industry. As we know the industry is not done that great so far. It is largely on account of lack of reforms from the government and lack of pick up in the investment cycle. Also, our interactions with fleet operators indicate the pricing pressure continues to remain across metro and the non metro routes. That is largely impacting the fleet operators’ profitability. So, personally I would remain cautious on the overall commercial vehicles space. As of now, we have got a hold rating on Ashok Leyland largely because the stock price has corrected. So, we have upgraded it to hold. But as a space we definitely see headwinds in the commercial vehicle space, largely driven by the lack of reforms, lack of investment cycle, the pressure on the fleet operators across metro and non metro routes. That is making the overall industry quite challenging. On top of that, you will also have the competition coming in from Bharat Benz and other players who are getting quite aggressive. That would keep the industry under pressure at this point of time. Q: What would like to buy at current levels? A: In the auto ancillary space, though we do not have an official coverage, but I continue to like Amara Raja in the battery space. Interactions with our dealers clearly indicate that there is an increase acceptance of the products from Amara Raja. Also, the warranty cost is going down. It has got a higher capacity as compared to Exide Battery. So, in that space, I would continue to like Amara Raja. In the tyre space, I would continue to remain positive on Apollo Tyres because that is highly exposed to replacement market. You have got the rubber prices getting corrected. I would like that in the auto ancillary space. Q: But of the lot that you have taken a passing interest in, which one would you like? I assume you would like Gabriel India, Motherson Sumi. A: Motherson Sumi definitely is a very good company. It covers almost 65% of the passenger car industry. In the long-term, you will definitely see the growth rate to continue in the passenger vehicle segment. It has got the pricing power in that space. I would be more inclined towards Motherson Sumi as compared to Gabriel at this point in time.