Easing commodity prices, supply snags to lift auto ancillary stks: Analysts

A turnaround in the margin pressure, faced by auto ancillary companies, may begin by the second half of fiscal year 2022-23 (H2FY23), analysts said, as they expect the industry to reap the benefit of softening commodity prices, and easing supply snags with a lag. However, higher inventory costs may continue to dent the financials in the near-term.

"Despite minor relief in margins due to cool off in commodity prices, we expect margins to remain subdued in the July to September quarter of the current fiscal (Q2FY23) due to higher inventory costs. We expect profitability to be visible from Q4FY23 onwards," said Ricky Kirpalani, Lead Sponsor, First Water Capital Fund (AIF).

Thus far in 2022, key raw materials used in automobile manufacturing like steel, iron ore, aluminum, nickel, and rubber have dropped in the range of 16 per cent to 45 per cent. 

The decline, Nishit Master, Portfolio Manager, Axis Securities, said could support margins of related companies coupled with higher utilization levels, and easing of semi-conductor shortages.

New order-book and EV push
 

Meanwhile, a bevy of car launches ahead of the festive season is expected to brighten fortunes of auto ancillary products. While Maruti Suzuki is scheduled to launch Grand Vitara this month; Mahindra and Mahindra, too, will launch XUV300 in September 2022. As per reports, around 10 to 15 passenger vehicles are scheduled to be launched later this year.

According to AK Prabhakar, head of research, IDBI Capital, auto-ancillary stocks like Sundram Fasteners, Bharat Forge, Timken, and Mahindra CIE may rally around 20-25 per cent in the short-to-medium term, benefitting from healthy order book and demand upsurge. 

"Tyre stocks, too, are also expected to see some relief as Brent Crude slumps to $90 per barrel," added Prabhakar.

That apart, auto ancillary companies, involved in manufacturing of crucial safety equipment, may benefit from the government's renewed push towards road safety provided over-regulation doesn't hamper sales, analysts said.

Union Transport Minister Nitin Gadkari, at a Business Standard event on Tuesday, said that the government will make it mandatory for carmakers to provide at least six airbags in an eight-seater vehicle from October onwards, in order to reduce road accident fatalities.

From electric mobility perspective, Gaurang Shah, investment strategist, Geojit Financial Services said Exide Industries and Amara Raja Batteries stand to benefit as both the companies have invested heavily to build battery manufacturing facilities.

On the bourses, shares of auto ancillary companies like Automotive Axles, Bosch, Fiem Industries, Gabriel India, GNA Axles, Lumax Industries, and Varroc Engineering have surged up to 36 per cent so far this year, shows ACE Equity data. In comparison, the S&P BSE Sensex and Nifty50 have gained over 1 per cent, during the same period.