When auto revs up, parts makers not far behind

Mumbai: Auto component makers are back on investors' radar as a rebound in vehicle sales and increased supply of chips have improved the outlook for the sector.

Shares of Sona BLW Precision, Minda Industries, Suprajit Engineering, Jamna Auto, and Minda Corp have rallied between 10% and 30% in the past month. Lumax Industries, Wabco India, and Lumax Auto gained between 5% and 10%. The benchmark Nifty declined nearly 4% during this period.

"Auto ancillary stocks have been in the limelight in the past few weeks, on the back of a recovery in automotive sales, normalising production schedules and targets by their clients and comfortable valuations," said Piyush Parag, analyst at Sharekhan. "The deep chips shortage issue that auto companies faced over a couple of quarters is gradually resolving, and auto ancillary companies are benefiting. Companies that have significant global exposure are well placed to benefit from the demand recovery."

Last week, Morgan Stanley said the chip shortage, which hampered vehicle makers' production in India, should be over, with chip output from Malaysia increasing in October.

Foreign institutional investors and domestic mutual funds in October increased their sector allocation to auto by 0.2% and 0.7%, respectively.

"Supplier consolidation in the export market has given significant benefits to the Tier 1 Players while the transition from China to India as a major export hub by International OEM is bringing newer business opportunities and technological transfer," said Vinod Nair, head of research at Geojit Financial Services. He recommends buying Bharat Forge, Minda Industries, Wabco, and Motherson Sumi because of their stronger technical expertise and increase in revenue share for EV products.

“We believe that the stabilisation in commodity prices and revival in the domestic demand are likely to push the margin upward for these companies,” said Nair.

Bharat Forge, in a recent analysts call, said demand remains strong across markets, and commercial vehicles are expected to grow on a sequential basis. Mahindra CIE is optimistic about growth in both India and Europe during 2022 and 2023, but a lot would depend on the availability of semiconductors.

“We like companies that have marquee auto OEMs and Tier-I clients in India and globally, and have proven sustainable business models and capital allocation history such as Suprajit Engineering, Schaeffler India, Sundram Fasteners, Ramkrishna Forgings, and GNA Axles,” said Parag.