Should you invest in auto stocks?

he auto sector has always found favour with mutual fund managers and has always been one of their preferred sectors.

Current statistics, however, are disturbing.

In April 2004, diversified equity funds (funds that invest in shares of different companies in different sectors) invested 11.92% of their money in the auto sector. The investment dropped to 7.40% in April 2005 and increased marginally to 7.45% in May 2005.

So if you are bullish on auto stocks, it would be wise to note that the fund managers are anticipating a slowdown in this sector. If you are willing to stay in for the long haul, go for it.

Here are the most preferred auto companies, based on the amount of money that has been invested in them by equity funds. We have also listed the funds that have made the most investments in auto companies.

Who has invested in what?

There are two figures mentioned here.

One is the percentage of the investment in terms of fund's total portfolio (investments).The other is the actual amount invested (Rs 10 million = Rs 1 crore).

Both are relevant up to May 31, 2005.

Maruti Udyog Ltd

They are one of the most trusted brands in the passenger car segment of the Indian auto industry since 1981 and continue to lead the Indian passenger car market.

Tata Motors

Tata Motors has the dual advantage of being the only auto major with the most comprehensive product portfolio.

It is India's largest commercial vehicle manufacturer and India's second largest producer of passenger vehicles.

Hero Honda

Hero Honda Motors Ltd is the largest manufacture of motorcycles in the world. This is one of the fastest growing segments in the two wheeler segment in India.

Bajaj Auto

Bajaj Auto is a key player in the two and three wheeler segment of the market.

Mahindra & Mahindra

M&M is a dominant player in the utility vehicles, tractors and light commercial vehicle segment.

Punjab Tractors

This leading farm equipment manufacturer has a strong presence in the northern part of the country and is now taking its Swaraj brand of tractors into other parts of the country as well.

The future

In the long term, the auto sector looks like a promising investment. The Indian auto sector has shown strong growth in the past and is likely to continue the trend, albeit with slight variations.

However, in the short to medium term, the auto sector looks weak as all major companies are faced with challenges like rising raw material costs, lower margins and intensified competition.

Also, the entire auto sector is set to go on a major capital investment spree. As per certain estimates, auto companies have earmarked a whopping Rs 25,000 crore as investment in new plants and technology over the next five years.

So, while earnings remain subdued in the near term, the long term has great potential.

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