Auto ancillary vs OEMs: Which industry is better for investment?

However, domestic brokerage firm Motilal Oswal anticipates that the auto industry will likely take a breather in FY25, following the strong demand seen over the past two years. The firm expects two-wheelers, passenger vehicles, and commercial vehicles to post a CAGR of 9%, 6%, and 6%, respectively, from FY24 to FY26.

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Conversely, Motilal Oswal believes the auto component industry is poised for significant long-term growth opportunities, with India emerging as a key beneficiary of the supply chain de-risking strategies adopted by global OEMs.

According to the brokerage, the domestic auto component industry is poised for sustained long-term growth, benefiting from a convergence of favorable factors. Among these factors is the emergence of the Indian component industry as a primary beneficiary of global OEMs’ supply chain diversification strategies, particularly amidst ongoing disruptions spanning the past 3–4 years. 

Additionally, it said that the industry has consistently outperformed its core counterparts, propelled by increasing content due to premiumisation trends and the ongoing transition towards electric vehicles. Moreover, supportive government policies, notably the ‘Make in India’ initiative, further bolster the industry’s prospects by fostering a conducive environment for domestic manufacturing. 

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Lastly, it highlighted the country’s burgeoning status as an automotive hub for global OEMs reinforces the nation’s pivotal role in the global automotive landscape, promising continued growth and opportunities for the domestic auto component sector.

With these robust trends and its inherent core strengths, including global quality at a low cost and improving R&D skills, the auto component industry is projected to invest approximately $6.5–7.0 billion over the next five years. 

This investment amount represents a doubling of the industry’s investment compared to the previous five years. In view of these tailwinds, the brokerage firm anticipates significant growth opportunities for the domestic auto component industry in the foreseeable future.

Indian auto industry: Near-term softness likely; long-term outlook intact 

While PVs have witnessed a 17% volume CAGR over the last two years, 2Ws have reported a 14% volume CAGR in the same period. After rebounding strongly in the last couple of years, both 2Ws and PVs are anticipated to witness softer growth in FY25. 

Motilal anticipates a 5% volume growth for passenger vehicles (PVs) in FY25, while projecting a 9% volume growth for two-wheelers (2Ws) during the same period. Conversely, it notes that commercial vehicles (CVs) experienced weak demand in FY24, remaining flat year-on-year over a relatively high base. 

With an anticipated slowdown leading up to elections, Motilal expects a revival in CV demand to commence with a lag of a quarter.

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“Thus, we forecasted CVs to report 6% volume growth in FY25, driven by the bus segment and largely back-ended. Thus, while growth rates for most segments are likely to taper down to single digits, the auto industry is likely to be the fastest-growing sector compared to other developed regions globally, which are witnessing recessionary trends,” said the brokerage. 

Valuation and top picks

Within the auto ancillary sector, the brokerage highlights Craftsman Automation as one of its top picks. The firm believes that Craftsman Automation is strategically positioned to capitalise on global supply chain derisking initiatives, benefiting from strong growth prospects in lightweighting and multiple drivers of growth within the storage solutions business.

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Additionally, the brokerage picks Samvardhana Motherson as it believes the company is well positioned as a key beneficiary of global trends favoring premiumisation and the transition to electric vehicles, bolstered by recent acquisitions.

Moreover, Happy Forgings is also a preferred choice. It said that the company is enjoying a sustainable competitive advantage in forgings, with robust new orders helping to offset near-term weaknesses in core segments. 

In the OEM sector, Maruti Suzuki stands out as the brokerage’s top choice. The firm anticipates Maruti Suzuki’s continued outperformance in the passenger vehicle segment, supported by forthcoming new launches. 

Additionally, the company’s improved product mix is expected to sustain margins at elevated levels. Furthermore, Maruti Suzuki could potentially benefit significantly if the government opts to reduce GST on hybrid vehicles.

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Furthermore, the brokerage selects Ashok Leyland as another top pick. Despite projected near-term weakness in commercial vehicle demand, the firm expects a revival by the second half of FY25. Moreover, Ashok Leyland’s attractive valuations compared to its peers make it an appealing choice for investors, it said.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 17 May 2024, 04:58 PM IST