Auto ancillary shares, as soon as favoured for his or her promising structural tailwinds, have now entered a section of valuation correction and efficiency reassessment. In accordance with Ambit, whereas the auto ancillary (Anc) sector provides a number of progress levers, it continues to lag authentic gear producers (OEMs) on key monetary metrics similar to money circulate technology and return on capital employed (RoCE).
Auto Ancillaries Supply Broad-Primarily based Progress Avenues
In its newest report, Ambit famous that auto ancillaries are benefitting from a broad set of progress drivers together with rising content material per car, worldwide growth, premiumization, and India’s price benefit. The sector can be witnessing structural tailwinds from evolving emission and security rules, elevated localization, and diversification into non-auto segments similar to industrial and electrical parts.
“Auto Ancs have a number of progress avenues, together with content material improve, entry into new merchandise/markets, and leveraging M&A. Premiumization, regulatory modifications and EV adoption are driving increased part demand,” Ambit mentioned. It added that tech synergies and offshoring alternatives additional improve the sector’s long-term prospects.
Weak Money Flows, RoCE Proceed to Weigh on Ancillaries
Nonetheless, Ambit underlined that auto part producers haven’t essentially outperformed OEMs when it comes to income, EBITDA, or PAT progress. Ancillaries even have increased capex depth and weaker working capital cycles, leading to decrease free money circulate (FCFF) and elevated debt ranges. “Scope to enhance profitability, phrases of commerce or RoCE seems restricted,” the report mentioned.
Regardless of long-term progress visibility, elementary challenges proceed to limit earnings high quality. “Whereas Ancs may even see sooner progress forward, their structurally weaker steadiness sheets and restricted room for working leverage make them financially susceptible,” Ambit noticed.
World Dangers and EV Disruption Might Damage Export-Oriented Gamers
Ambit recognized three key exterior dangers for the ancillary phase — tariff pressures beneath USMCA, European Union demand weak spot, and intensifying Chinese language competitors. These are significantly crucial as many Indian ancillaries are closely reliant on exports to North America and Europe.
The brokerage additionally pointed to the chance of EV-led disruption, particularly for part makers with increased publicity to inner combustion engine (ICE) components. That mentioned, Ambit believes these challenges might pave the best way for brand new alternatives, similar to EV-specific part exports and offshoring to India from confused European distributors, albeit with longer gestation intervals.
DIIs Closely Chubby on Ancillaries; FIIs Choose OEMs
Ambit famous that Home Institutional Buyers (DIIs) have continued to keep up an chubby place on auto ancillaries, attracted by increased progress potential and rerating-led features. This positioning had paid off till early 2024. Nonetheless, put up the latest correction—primarily triggered by tariff dangers—the valuation hole between ancillaries and OEMs has considerably narrowed.
In distinction, Overseas Institutional Buyers (FIIs) have largely stayed underweight on auto ancillaries, preferring the comparatively extra secure and cash-generating OEMs, Ambit mentioned.
Inventory Suggestions
Ambit’s relative analysis framework assesses six auto ancillary shares based mostly on enterprise fundamentals, monetary energy, and valuation metrics. Primarily based on this, the brokerage really helpful a ‘BUY’ on Endurance Applied sciences (ENDU), Motherson Sumi (MOTHERSO), and Samvardhana Motherson Worldwide (MSUMI). It downgraded Bharat Forge (BHFC), Sona BLW Precision Forgings (SONACOMS), and Pleased Forgings (HAPPYFOR) to ‘SELL’.
“Our pecking order in Auto Ancs is ENDU (BUY) > MOTHERSO (BUY) > MSUMI (BUY) > HAPPYFOR (SELL) > SONACOMS (SELL) > BHFC (SELL),” Ambit mentioned.
Inside the general auto area, Ambit continues to advocate decreasing the chubby allocation that many institutional traders at the moment keep, suggesting a impartial stance going ahead. Amongst all auto shares, Ambit’s prime three BUYs are Mahindra & Mahindra (MM), adopted by Endurance (ENDU) and Motherson (MOTHERSO). It additionally added Tata Motors (TTMT) to its most well-liked picks.
Disclaimer: The views and suggestions made above are these of particular person analysts or broking corporations, and never of Mint. We advise traders to verify with licensed consultants earlier than making any funding choices.
