On22nd September SENSEX reeled down above 2%. This was not a big tremor to the public because they got used to such shakeouts since the August 24th fall post China crisis. This time the story turned towards the other part of the globe, EUROPE, where there was a mostly calm situation apart from the known fact that the European economy is almost a stagnant economy. Volkswagen has cheated the US authorities by using a faulty emission test norm to sell about 11 million cars fitted with a poor performing diesel engine. Whereas, the company had been advertising across the US stating that their cars come with the cleanest diesel engine.
Now, the company is recalling 11 million cars from the market to fix this issue and it has earmarked more than 6billion euros to meet the crisis. The US government has filed a case against the company claiming damages to the tune of $18 billion. Its CEO Winterkorn, admitted to have screwed up the company for good. Volkswagen stock loses 48% value in 2 days since the issue got reported. The company being the beacon of engineering excellence in Germany, an automobile behemoth controlling most of the prominent brands under its ownership like Audi, Skoda, Porsche etc.,
The impact of this scandal to the global markets has been multilevel. Due to Volkswagen’s huge exposure in the auto sector and the prominent brands it owned, there are a number of companies globally, who are vendors to the groups businesses in Europe as well as across the globe. All these companies will get affected. Germany being the hub of Automobile engineering, there are a lot of Indian companies who own facilities in Germany and across Europe. Some of the big names are Motherson Sumi, Amtek India, Bharat Forge. All these companies have already taken a big hit on their stock prices.
Amtek is into a bigger default, already faltered on a 800 Crore debt and has about 15K Crores which are not likely to be serviced. This issue is going to take many of the PSU Banks and some Mutual Funds into hardship.
At a time when the world markets are under pressure due to the commodities meltdown, this issue added fire. The beauty here is that, the automobile industry segment was the leader in the last year’s market gains. There were many companies in the Auto Ancillary sector that gave very high profits to their shareholders. Now, within a year the same sector has become party to huge loss of wealth. This makes us realize that, anything that shines cannot shine for ever or at least cannot continue to hold the strength regularly. If someone has been invested in the auto stocks by virtue of their understanding of the industry growth, they should have already moved out of the investments, else will suffer losses now. The damage that is being played out is pretty huge and will take a lot of time to recover.
In our portfolio, we had big time exposure to auto stocks, mainly in the ancillary segment. A couple of weeks back our system had helped us move out of them to a larger extent. When auto stocks were in rally mood we had more of them, now as they enter into troubled zone, the exposure has got reduced by a natural process.