Mid- and small-cap auto and ancillary stocks charge ahead on new Sebi norms

Among the mid- and small-cap firms part of the BSE Auto index, Ashok Leyland surged the most
Investors flocked to mid-cap and small-cap auto and auto ancillary firms on Monday, setting off a rally in the stocks.

Among the mid- and small-cap firms part of the BSE Auto index, Ashok Leyland surged the most. Shares of the Hinduja flagship firm recorded a 9.8 per cent rise to close at Rs 74.9 apiece.

A sequential recovery in commercial vehicle sales has driven investor sentiment upward. Ashok Leyland, however, is yet to reach the previous high of over Rs 100 it had attained during the pre-Covid phase. TVS Motor also gained 2.7 per cent to close at Rs 456.9.

Most auto ancillary stocks — from tyres and batteries to ball bearings — also raced ahead. Notable ones were Balkrishna Industries, Timken, Apollo Tyres, and Endurance Technologies, gaining over 4 per cent.  

On Friday, Sebi said multi-cap funds should have a certain percentage of their corpus invested each in large-caps, mid-caps, and small-caps. It has mandated that at least 25 per cent of the fund’s corpus be deployed in large-caps, mid-caps, and small-caps each.

Analysts said the move bodes well for mid-cap and small firms in the auto space. “Auto ancillaries will benefit from the increased allocation in the near term. It’s akin to a large-cap being included in the Nifty,” said Aditya Makharia, vice-president at HDFC Securities..

Makharia however, pointed out that not all stocks would gain and at the end of the day; what matters most is the quality and the investor confidence on fundamentals of the company.  

The cut-off date to have the mandated 25 per cent corpus invested equally in small-cap, large-cap, and mid-cap funds is January 2021, and may see lot of MFs re-align their portfolios.

Besides the so-called technical factor, analysts have also attributed the current rally in mid-cap and small-cap stocks to an attractive valuation, which is prompting investors to buy these stocks.

A month-on-month recovery and an end of a down-cycle, too, have added to the optimism.

“We re-initiate on the Indian auto sector with a positive bias, based on our expectation of strong volume growth and margin expansion in the initial phase of recovery,” wrote Arya Sen and Indarpreet Singh, analysts at Macquarie Research, in a September 1 report.

Top picks for the company are Bajaj Auto, Escorts, and M&M. It has an ‘outperform’ rating on Maruti, TVS Motors, Ashok Leyland, Endurance, Motherson Sumi, Mahindra CIE, and Sandhar. Further, it has a “neutral” rating on Tata Motors, Hero, Eicher, and Minda Industries.

The BSE Smallcap outperformed the broader market on Monday, surging 4 per cent at the end of the trading session. Year-to-date, it has risen 10 per cent as compared to the 1.8 per cent fall in the auto Index and 6.1 per cent decline in the Sensex.  

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