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Home >Markets >Mark To Market >Auto component stocks get a joy ride on the back of demand, festival sales

The ride for auto companies has been good so far and the growth of the auto component industry is not far behind. Stocks of several auto ancillary companies gained between 4-35% in November, riding on the back of an increase in automobile demand. Stocks of some large auto component players such as Motherson Sumi Systems Ltd, Endurance Technologies Ltd and Amara Raja Batteries Ltd are over or near their pre-covid highs.

The growth momentum has been in favour of auto component companies, which have had a decent start to festival season sales. The Q2 growth in some auto ancillary companies has been better than that of original equipment manufacturers (OEMs).

Revenue growth has also got a lift because of the rise in replacement demand. Some of that also coincides with the increase in demand for used vehicles. However, except commercial vehicles, all segments of the auto industry are faring well.

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Analysts at Elara Securities (India) Pvt. Ltd reckon that revenue growth for 47 auto ancillary companies were up 2% year-on-year (y-o-y). This was largely led by replacement focussed ancillaries, which saw an 8% y-o-y growth, while tractor-focussed companies grew 7% y-o-y.

Firms have also saved on costs, aiding margins in Q2 such as travelling and other expenses. Besides, auto ancillary companies are reporting better capacity utilization, said analysts.

“Production trends have been good in Q3 so far, hence sales revenue could sustain. However, given that salaries have been re-instated and much of the costs are coming back, margins may get squeezed in Q3," said Ashutosh Tiwari, head of research, Equirus Securities.

The festival season cheer may continue to rub off on automobile components in the next two quarters. However, the replacement-focussed companies continue to have an edge. “Replacement segment likely to remain buoyant until March 2021, and the growth rate of OEM-focused ancillaries are expected to pick up over Q3-Q4 from Q2FY21," according to the Elara Securities report.

Analysts also see auto ancillary firms posting better growth rates than OEMs in the coming quarters. “A first rally happens in OEMs and when investors see that auto volumes are good and there is sustainability and then at the next level, investors look at ancillary companies. In fact, ancillaries can post a better growth than OEMs on the back of market share gains, import substitution and new product additions," said Tiwari.

The auto ancillary industry has the advantage of growth tailwinds, but one worry is rising raw material costs. This would also have a bearing on margins going forward. Besides, any slowdown in demand offtake from OEMs may act as speed breakers. Then again, with the stock prices of many firms already up considerably, some caution is warranted.

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