JK Tyre, Exide: Analysts advise staying selective in auto ancillary space

Auto sales entered fast lane in October as a trinity of pent-up demand, on-set of festive season, and preference for personal mobility nudged people to splurge in vehicle buying. That said, slow economic recovery and the consequent hit on income led to skewed sales.

Consider this. Maruti Suzuki India, the country’s largest passenger carmaker, which sold 163,656 units in the domestic market in October, up 18 per cent YoY, saw growth being driven primarily by the entry-level segment. Add to it, two-wheeler maker Hero MotoCorp clocked record sales of 8.06 lakh units during the month on the back of buying in urban, semi-urban, and rural areas.  

However, whether a buyer picks a two-wheeler or a four-wheeler, one segment that is likely to see a demand recovery is the auto ancillary segment.

The momentum in auto sales, Vinit Bolinjkar, head of research at Ventura Securities says, has significantly improved auto parts sourcing by original equipment manufacturers (OEMs) and has benefited auto ancillary companies. This, he says, has also created a strong aftermarket for the replacement industry such as batteries, tyres, etc.

The market has been quick to spot the opportunity. Over the past few sessions, tyre stocks have been on a roll with JK Tyre, Ceat, MRF logging smart gains at the bourses.

On the operational front, JK Tyre reported profit before interest depreciation and tax (PBIDT) of Rs 367 crore as against Rs 303 crore in the corresponding quarter of the previous fiscal. Apollo Tyres, on the other hand, posted an over two-fold increase in consolidated net profit at Rs 200 crore for the September quarter on the back of robust sales. The company had reported a net profit of Rs 83 crore in the July-September period of 2019-20. READ ABOUT IT HERE

“The recovery in the auto sales is definitely a big positive for the auto ancillary stocks. However, the sustenance of this growth post festive season continues to worry investors as highlighted by some of the management of original equipment manufacturers (OEMs). Nonetheless, we believe that growth would moderate but gradually pick up pace driven by increase in rural income and increased preference towards personal mobility,” says Ajit Mishra, VP – Research at Religare Broking.

That said, amid skewed recovery in the auto segment, analysts suggest adopting a selective approach while picking stocks in the segment.

Aditya Makharia, institutional research analyst at HDFC Securities says that investors should pick stocks of those companies that have a suitable product portfolio.

“The auto sector has witnessed a broad-based rally, with the Nifty Auto Index significantly outperforming the broader Nifty50 since March lows. Going ahead, we believe that stock prices will be determined by the product mix or business strategies of the various OEMs and ancillary companies. Therefore, investors may look at those companies which can sustain or expand their market share,” he says.

Between March 24 and November 4, Nifty Auto index has leaped 68 per cent on the National Stock Exchange (NSE) as against 53 per cent jump in the Nifty50 index, ACE Equity data show.

"Post the rally, Exide Industries is trading at 15.8X FY22 P/E, Varroc Engineering (16.4X FY22 P/E), Minda Industries (29.6X FY22 P/E), Endurance Technologies (23.8X FY22 P/E), Ceat(15.3X FY22 P/E), and Lumax Industries (17.9X FY22 P/E), making them attractive," says Bolinjkar.

Among individual stocks, Munjal Showa, JBM Auto, Subros, Rane Brake, Jamna Auto, Varroc Engineering, Motherson Sumi Systems, Lumax Industries, Endurance Technologies, GNA Axles, and Minda Industries have risen in the range of 39 per cent and 139 per cent during the period.

Shashank Kanodia, research analyst at ICICI Direct, however, cautions that the sector is not a blanket 'buy' anymore. Investors, he says, should consider auto ancillary stocks from two perspectives. First would be ancillaries that derive sales primarily from their OEM clients and have less share of aftermarket sales. For them, growth is highly determinant of what OEM’s sales volume are.

"The other group would be ancillaries, like battery and tyre players, which derive nearly 60-70 per cent of demand from after-market sales (and rest around 30-40 per cent from OEM’s). Here, their products are replaced at regular intervals depending upon the vehicle run and hence for them demand looks more sustainable and long lasting,” he explains. Given this, he remains positive on Exide Industries.