Weak auto sales, rising costs may hit ancillary cos in near-term: Analysts

High valuations, cautious sentiment challenge PV and commercial vehicle firms

With wholesale passenger vehicle (PV) sales declining for a second consecutive month in August, analysts forecast a challenging near-term outlook for automotive (auto) ancillary companies.

Saji John, senior research analyst at Geojit Financial Services, believes that weak domestic demand in some segments, coupled with supply-chain issues, may cause auto ancillary stocks to remain 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 mix face near-term challenges,” he said.

Despite these challenges, analysts believe that companies that adapt to changing market dynamics, invest in new technologies, expand globally, transition to electric vehicles, and benefit from government subsidies may withstand the headwinds.

 

“Auto ancillary companies whose major clientele includes two-wheeler makers could benefit from stable rural demand,” said John of Geojit Financial Services. He recommends Uno Minda, Gabriel India, and Endurance Technologies on dips from a long-term perspective.

Similarly, Shetty of StoxBox recommends Shriram Pistons & Rings and Fiem Industries.

Mixed show

On the bourses, meanwhile, major auto ancillary stocks have shown mixed performance so far in 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 Forgings, and Varroc Engineering have gained between 0.69 per cent and 71.17 per cent during the period, according to ACE Equity data.

In contrast, Jamna Auto Industries has shed 4.46 per cent during the same period. By comparison, the National Stock Exchange Nifty 50 and Nifty Auto indices have gained 13.23 per cent and 21.55 per cent, respectively.

Rising costs, weak demand

Domestic sales of PVs dropped 2-3 per cent year-on-year (Y-o-Y) to about 355,000 units in August, following a 2.5 per cent Y-o-Y decline in July.

Independent market analyst Ambareesh Baliga cautioned that if auto sales do not pick up during the festival season, a drastic cut in production plans by original equipment manufacturers could considerably affect ancillary companies.

However, he does not see signs of a slowdown in the sector, as auto ancillary firms are following advanced production schedules and seem to be on track.

On the cost front, the price of natural rubber, a key component for tyres, is around Rs 247 per kilogram (kg), the highest in 15 years. Rubber prices were Rs 182 per kg at the start of the current financial year (FY25).

Similarly, aluminium prices, around $2,200 per tonne at the beginning of August, are now quoting around $2,440 per tonne. However, these prices are off their highs due to weak economic data from China.

Oil prices also cracked over 4 per cent on Tuesday and were down more than half a per cent on Wednesday due to easing supply concerns.

Analysts believe that fluctuations in input costs will remain a key monitorable for auto ancillary companies. Any further rise in costs and low realisations could pressure margins.

In the April-June quarter (Q1) of FY25, ASK Automotive’s earnings before interest, tax, depreciation, and amortisation (Ebitda) margin was 11.9 per cent, up from 9.8 per cent in the same period last year.

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 Corporation’s margin was 11.1 per cent in Q1, up from 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 also saw 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.