Should you consider ancillary stocks amid demand and valuation concerns in auto sector?
Diversified auto ancillaries’ revenue growth stood at 23% YoY in Q1FY25, while their EBITDA increased by 29% YoY during the same period. In comparison, auto OEMs experienced a 9% revenue increase, with their EBITDA growth at 21%, according to a Nuvama note. The coverage included Bharat Forge, Endurance Technologies, CIE Automotive, SAMIL, Sona BLW Precision, Uno Minda, and Varroc Engineering.
Going forward, premiumisation, robust order books, exports, and a focus on EVs are expected to drive higher content per vehicle, thereby enhancing profitability for auto ancillaries, according to a note from Axis Securities.
Q1FY25 was a steady quarter for the auto sector as a whole with topline growth for OEMs coming on richer product mix, strong demand trends, and benign raw material cost. It was led by two-wheelers even as passenger vehicles showed growth moderation.
Nuvama attributed the outperformance of diversified auto ancillaries to strong automotive volumes. It noted that while tyre companies were affected by high raw material prices, bearing companies had a mixed quarter.
Kranthi Bathini, Director-Equity Strategy at WealthMills Securities believes that auto ancillaries that have exposure to exports and electric vehicles offer investment opportunities even as he admitted that most of the positives are priced in now for a near-to-medium term. He warrants caution given the rally seen by auto sector counters.
This sector is among the top three performers, behind realty and on par with the oil & gas sector. The
