Auto ancillary stocks attractive on dips as sector holds momentum: Analysts

Smooth ride expected for the sector in FY25

Shares of auto component manufacturers have corrected up to 10 per cent in the last month after clocking a sharp rally in the previous financial year FY24. The correction in the stocks is a good buying opportunity as the auto story remains strong from a long-term perspective due to rising disposable income and a possibility of an interest rate cut in the future adding to the comfort of buyers, analysts said.

"The recent downturn in ancillary stocks has made the prices attractive. It's a good opportunity to buy at current levels as the overall sentiment in the auto sector remains strong," said Deven Choksey, MD, DRChokseyFinserv.

Shares of Apollo Tyres, MRF, and Bharat Forge have shed 10 per cent, 8.4 per cent, and 0.4 per cent, respectively, in the last month. In comparison, the Nifty Auto index rose 4.4 per cent during this period, ACE Equity data shows. In FY24, the Nifty Auto index surged 77 per cent as against a 28 per cent rise in Nifty 50.

Mumuksh Mandlesha, research analyst at Anand Rathi Institutional Equities, attributes this correction to the meltdown in the mid and smallcap space, the segment where most of these component manufacturers belong.

In the fast lane

According to data provided by the Federation of Automobile Dealers Associations (FADA), a total of 24 million vehicles were sold in FY24 against 22 million units in FY23, a rise of 10 per cent year on year (Y-o-Y). This is despite the decline in sales of commercial vehicles (CVs), passenger vehicles, and tractors in March. The analysts expect the trend to continue in Q1FY25.

In March 2024, retail sales witnessed a modest growth of 3.14 per cent Y-o-Y. The two-wheeler (2W) and three-wheeler (3W) segments saw increases of 5 per cent and 17 per cent, respectively, while passenger vehicles, tractors, and commercial vehicles faced declines in the range of 3-6 per cent.

Going ahead, while analysts expect CVs and tractor sales to be muted in Q1FY25 due to the election season, they anticipate a good pickup across CVs and tractor sales on a full-year basis. The export for 2Ws continued to recover. TVS Motor and Hero MotoCorp reported volume growth of 28 per cent and 88 per cent on a Y-o-Y basis in March.

Overall exports are still below their peak performance owing to issues related to currency unavailability and other macro headwinds in key export geographies, said analysts at JM Financial.

Investment Strategy

Against this, analysts suggest investors selectively buy the ancillary stocks on dips as certain stocks, with fair valuation, may have limited upside. The Nifty Auto is currently trading at a price-to-earnings (P/E) multiple of 25.9x, which is below its last two-year average of 37.14x and a tad higher than its two-year low of 22.84x.

Mandlesha of Anand Rathi Institutional Equities prefers component manufacturers that are more exposed to the 2W segment like Endurance Technologies, Sansera Engineering and Gabriel India, as he expects 2W auto exports to see a revival after two years with an estimated 15 per cent volume CAGR on a low base.

Those at Motilal Oswal, meanwhile, recommend buying Craftsman Automation and SAMIL.