• OUTLOOK ARENA
  • APRIL 30, 2022

My Top Auto Ancillary Bet for 2022

While the automobile sector has been down in the dumps... Find out why I believe betting on proxy plays like auto ancillary along with Auto stocks will generate the alpha.

With limited downside, find out which auto ancillary stock is my preferred pick to play this cycle.

Hi guys, this is Aditya Vora here.

Hope you guys are doing well.

In my last video, I spoke about how most of the negatives were priced in auto OEMs.

Let's talk about an extension to the auto sector... that is the auto ancillary space.

Did you know that a conventional car has 30,000 parts?

I'm sure you must have heard the news of how semi-conductor shortages derailed the production schedules of auto companies.

This reminds me of the importance of auto ancillary companies.

Personally, I'm very bullish on the auto and auto ancillary sector.

I mean look at the scepticism around... Isn't that the best time to buy stocks?

Now enough of gyaan... Now let's get straight to the point.

I will be talking about 2 things in this video.

First is which auto ancillary stocks should you buy.

And second is which auto ancillary stocks you should avoid.

Needless to say these are my personal views. I could be wrong.

Before I start talking about auto ancillary stocks, I hope you guys took my advice on Hero MotoCorp in my last video.

The stock is 10% up in less than 15 days.

I continue to remain positive about the stock. At this valuation there is nothing to lose.

Anyways, lets get back to auto ancillary stocks.

Now, no future recommendation in the automobile or auto ancillary space can be complete without focus on the electric vehicle ecosystem.

After all, EV sales barely account for 1.3% of the total vehicle sales in India.

As per my view, the revolution in the EV sector is likely to capture the 2-wheeler and 3-wheeler industry first followed by buses and passenger vehicles.

The commercial vehicles that is the truck segment is immune to electrification at least for the next 5-7 years.

So, in the auto ancillary space my first bet is a company called Jamna Auto which makes suspension systems for the commercial vehicle industry.

Now this Delhi based company makes leaf springs, parabolic springs and axles for trucks, buses, tippers, and trailers.

The main purpose of a parabolic leaf spring is to spread the weight of the vehicle more widely over the vehicle's chassis.

Apart from these products, Jamna Auto also makes axles, air suspension, and trailer suspension systems too.

65% of its revenue comes from the OEM segment while 33% comes from after market sales where the margins are relatively higher. Exports account for about 1-2% of revenues.

Well this was the basic information about Jamna Auto.

Let me give you 3 reasons why you should have a look at this company.

  1. Jamna Auto has a 70% market share. The company supplies to almost all the CV players. Right from Tata Motors who is the market leader to Ashok Leyland, Eicher Motors, and Bharat Benz who are dominant players and account for 90% of commercial vehicle volumes in India.

    You name the CV player and Jamna Auto is a supplier of suspension systems to them.

    In fact, it is a sole supplier to Ashok Leyland and a major supplier to Tata Motors.
  2. In my view EVs in the commercial vehicle space is far-fetched. So that means there is no new R&D or product investment required for players like Jamna Auto. Also, EV or no EV, a truck needs suspension system. It is not a replaceable component.
  3. Lastly, the automobile sector, especially the CV space, is fraught with bad news. All of us know how badly hit the auto sector is. It still hasn't recovered. I mean in CVs we are still at 2017 levels. No movement for 5 years. If your bet is on the GDP and India, the best proxy is the CV sector.

What better company to play than Jamna Auto?

The last thing about Jamna Auto is the icing on the cake.

Despite of the down cycle in the commercial vehicle space, you will be surprised to see the efficiency ratios of Jamna Auto.

In a downtrend the company has maintained a 3-year average return on capital employed at 22% and a 3-year average return on equity at 17%.

Also, the company is debt free. So even in the worst downturn nothing can go wrong as you don't owe anyone any money. The first rule of solvency.

Many of the auto ancillaries are struggling over the past 5 years.

So, this was the basic analysis of Jamna Auto.

Now the issue is that the stock has already run up and is at a 52-week high.

Obviously, there is no point looking at the historical price to earnings ratio as when the cycle turns earnings will more than double in a short time and PE will look cheap.

However, a lot seems to be priced in the stock.

While it looks over valued in the near term, any serious correction should be looked in to.

Now let's talk about the auto ancillary stocks to avoid.

Any auto ancillary making engine parts or fuel system parts should be avoided.

As the 2-wheeler, 3-wheeler and eventually the passenger vehicle market migrates to electric vehicles, who will the auto ancillaries making engine parts and fuel systems sell to?

Companies like Bharat Forge and other forging companies will have to mitigate the risk by venturing into other line of products.

Also, the companies making fuel systems. When there is no fuel in the vehicle what will these companies do?

I know a lot of people are sceptical about investing in auto and auto ancillaries. But trust me, the best time to invest in is when the sector is unloved.

That is how you create alpha in the long term.

So guys that was about the auto ancillary stocks.

Thank you for watching this video and do write to me about what you feel about these stocks.

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