The rebound in the automotive sector was propelled by several factors, including a boost in economic growth and higher personal incomes, which drove up demand for commercial vehicles (CVs).
Furthermore, there was a significant transition from public to private transportation and a growing preference for premiumisation, leading to an increased demand for SUVs. Notably, in FY24, India witnessed its highest-ever domestic sales of passenger vehicles.
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The recovery in the rural market led to an increase in two-wheeler sales and strong demand for bikes in the 200 cc segment, all contributing to robust demand for auto components. Additionally, growth in aftermarket sales and exports has further boosted the volume of auto parts.
Amid this backdrop, stocks in this sector have seen substantial gains, with Shriram Pistons & Rings being one of them. Over the last one year, the shares have appreciated from ₹802.95 apiece to the current level of ₹2,067, resulting in a gain of 157%.
Over the last two years, the shares have soared 512%, and in the last four years, the shares have delivered an impressive return of 654%.
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Last week, the company’s shares spiked over 5% following the release of its Q4 and FY24 performance, which came in line with analyst estimates. Revenue from operations in Q4 rose by 12.6% year-on-year (YoY) to reach ₹802 crore, while for the full fiscal year (FY24), revenues increased by 14.5% YoY to ₹3,351 crore.
Additionally, the profit after tax (PAT) grew by 30.2% YoY in Q4 FY24 to Rs.120 crore. For the entire fiscal year, the PAT stood at ₹446 crore, marking a significant improvement of 51.2% compared to the previous year’s ₹295 crore.
Growth story to continue
The management highlighted expectations of continued outperformance compared to the underlying automobile industry, driven by deeper customer penetration and steady growth in the aftermarket and export segments.
They have provided guidance for a healthy 5-7% growth in the two-wheeler (2W) and passenger vehicle (PV) segments for FY25E, with commercial vehicles (CVs) expected to remain flat, anticipating an uptick starting in the third quarter post elections.
SPRL has invested approximately ₹700 million in the construction of its plant in Coimbatore and around Rs. 800 million in the Pithampur plant, which is set to commence production in March 2024. These new plants are backed by new order wins, according to Emkay Global Financial Services.
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The new capacities at both Pithampur and Coimbatore (focusing on EV powertrains) are in the process of getting fully booked through client order wins. The EV powertrain business (EMFI) is expected to witness significant growth over the next few years as the company collaborates with several OEMs across various segments.
SPRL maintains an aggressive growth strategy through mergers and acquisitions, currently working on two deals. The strong margin improvements in recent years have resulted from multiple actions aimed at improving productivity, efficiency, capacity utilisation, and cost initiatives, such as adopting renewable power sources; these actions are sustainable.
SPRL has an extensive footprint in the aftermarket, with over 1,200 touchpoints in India and a presence in 45 countries, including a comprehensive servicing network. This network will also support growth in the EV sector, as highlighted by the brokerage.
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Shriram Pistons & Rings has solidified its position as a premier manufacturer of pistons, piston pins, piston rings, and engine valves in India. Additionally, it holds the distinction of being the largest exporter to the world’s OEMs and aftermarkets.
Its products, marketed under the brands SPR and USHA, enjoy wide-reaching distribution, catering to esteemed OEMs and aftermarkets both domestically and internationally. The company ranks among the top 100 largest auto industry suppliers globally and operates 40 production plants across Europe, the Americas, Japan, India, and China.
Structurally, the company is organised into three divisions: mechatronics, motor service, and hard parts, encompassing a diverse range of offerings, including pistons for cars and commercial vehicles, among other products.
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Bright future outlook
India is poised to be a significant beneficiary as global OEMs seek to de-risk their supply chains following recent disruptions. Favorable domestic trends, such as rising premiumisation across all product segments, are driving growth.
Additionally, the government’s push for stricter regulations to align with global standards, such as the transition from BS4 to BS6, and the allowance of 100% FDI under the automatic route for the auto components sector, are strengthening the industry.
The government’s focus on ‘Make in India’ through various initiatives and schemes, including the PLI Scheme and FAME II, is propelling the transition to electric vehicles (EVs). The Indian automobile market is expected to grow at a CAGR of 6–8%, driven by a growing working population and an expanding middle class.
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The sector contributes approximately 7.1% to the national GDP, a significant increase from 2.7% in 1992–93. Additionally, India offers significant cost advantages, enabling auto companies to save up to 25% on operations compared to Europe and Latin America. The country’s large, skilled, and semi-skilled workforce is also beneficial for the labor-intensive auto and auto component industries.
On the electric vehicle front, the government’s focus on reducing emissions is shifting towards electric cars. India has the potential to lead in shared mobility by 2030, creating opportunities for electric and autonomous vehicles.
The market size for EV-based components is projected to rise to ₹640–680 billion by 2030, from an estimated ₹140–150 billion in FY25, according to industry reports. By 2030, the government aims for 30% of new vehicle sales in India to be electric. The ‘Make In India’ initiative, supported by PLI schemes, is expected to significantly boost the EV transition across key segments.
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While the EV industry is booming, it still faces numerous challenges and has a long way to go. In the meantime, internal combustion (IC) engines will continue to grow alongside the expanding automotive industry.
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: 20 May 2024, 09:46 AM IST