With wholesale passenger vehicle (PV) sales declining for a second consecutive month in August, analysts forecast a bumpy near-term outlook for ancillary companies.
Saji John, senior research analyst at Geojit Financial Services, for instance, believes that weak domestic demand in some segments, coupled with supply chain issues, may keep auto ancillary stocks sideways in the immediate term.”The near-term market sentiment is cautious for the sector due to high valuations. Companies with a high PV and commercial vehicle (CV) mix eye near-term challenges,” he said.
On the bourses, major auto ancillary stocks have performed mixed, so far, in the current financial year of 2024-25 (FY25).
As of September 3, shares of ASK Automotive, Bosch, Craftsman Automation, Gabriel India, JBM Auto, Minda Corporation, UNO Minda, Sona BLW Precision and Varroc Engineering, among others, have gained between 0.69 per cent to 71.17 per cent during the period, ACE Equity data shows.
Jamna Auto Industries, on the contrary, have lost 4.46 per cent, respectively, during the period. By comparison, the Nifty50 and Nifty Auto indices have gained 13.23 per cent and 21.55 per cent respectively.
Double whammy of rising costs, weak demand
Domestic sales of passenger vehicles (PVs) dropped 2-3 per cent year-on-year (Y-o-Y) to about 355,000 units in August. PV sales had registered a 2.5-per cent Y-o-Y decline in July.
Independent market analyst Ambareesh Baliga, too, cautioned that if auto sales don’t pick up during the festive season, a drastic cut in production plans (of OEMs) will affect the ancillaries considerably.
However, he does not see signs of a slowdown in the sector, as auto ancillary firms are in advanced production schedules, and seem to be on track.
On the cost front, the prices of natural rubber, a key component for tyres, is around Rs 247 per kilogram at present, the highest in 15 years. Rubber prices were Rs 182 per kg at the start of the current financial year.
Similarly, Aluminium prices, which were hovering around $2,200 per tonne at the beginning of August, are quoting around $2,440 per tonne at present. The prices, however, are off highs due to weak economic data from China.
Oil prices, too, cracked over 4 per cent on Tuesday, and were down over half a per cent on Wednesday on easing supply concerns.
Analysts believe movement in input costs will remain a key monitorable for auto ancillary companies ahead as any further rise in costs, along with low realisations, may put pressure on margins.
In the April-June quarter of the current financial year (Q1FY25), ASK Automotive’s earnings before interest, tax, depreciation, and amortisation (Ebitda) margin came in at 11.9 per cent, against 9.8 per cent in the year ago period.
Similarly, Ebitda margins for Gabriel India, JBM Auto, and Samvardhana Motherson stood at 9.6 per cent, 14.1 per cent, and 9.6 per cent, respectively.The companies had posted Ebitda margins of 8.6 per cent, 14.2 per cent, and 9.6 per cent, respectively a year ago.
Meanwhile, Minda Corp’s margin stood at 11.1 per cent in Q1, against 11 per cent a year ago.
Tyre major MRF, however, reported an Ebitda margin contraction of 160 basis points to 16.1 per cent from 17.6 per cent last year. Apollo Tyres, too, slipping witnessed a margin contraction to 14.4 per cent from 16.8 per cent Y-o-Y.
According to Sagar Shetty, research analyst at StoxBox, any move by carmakers to balance dealer stocks could impact the order volumes of auto ancillary firms.
Investment strategy
Against this, analysts believe companies that adapt to the changing market dynamics, invest in new technologies, expand globally, transition to electric vehicles, and enjoy government subsidy support may withstand the headwinds.
“Auto ancillary companies whose major clientele include two-wheeler makers could benefit from a stable rural demand,” said Saji John of Geojit Financial Services. He prefers UNO Minda, Gabriel India, and Endurance Technologies on dips from a long term perspective.
Similarly, Sagar Shetty of StoxBox recommends Shriram Pistons and Rings, and Fiem Industries.
First Published: Sep 05 2024 | 7:25 AM IST
