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Auto Ancillaries Sector Analysis Report 

[Key Points | Financial Year '20 | Prospects | Sector Do's and dont's]

India's Capex Comeback: Explore Small Cap Stock Opportunities

  • The Indian auto ancillary industry is one of the crucial industries in India and contributes 2.3% to the total GDP. It is mainly driven by the strategic alliance and in-house research and development setup of industry players. The industry employs as many as 1.5 million people directly and indirectly.
  • The fortunes of the auto ancillary sector are closely linked to those of the automobile sector. Demand swings in any of the segments (cars, two-wheelers, commercial vehicles) have an impact on demand for auto ancillary products. Demand is derived from original equipment manufacturers (OEM) as well as the replacement market.
  • The industry can be broadly classified into two categories - organized and unorganized. The organized sector caters to OEMs and consist of high-value precision instruments while the unorganized sector comprises low-valued products and caters mostly to the aftermarket category. Some examples of auto ancillary industries are - Tyre industries, Battery, Gears, Engines etc.
  • Both domestic and export markets are almost similar in terms of market share breakup. Engine and Exhaust components along with body and structural parts make up nearly 50% of the potential domestic sales as well as exports. Transmission and Steering parts, and Electronics and Electrical equipment are the other key products.
  • India is emerging as global hub for auto component sourcing. A cost-effective manufacturing base keeps costs lower by 10-25% relative to operations in Europe and Latin America. Relative to Chinese suppliers, India is also geographically closer to key automotive markets like the Middle East and Europe.
  • The Department of Heavy Industries and Public enterprises has created a US$ 200 million fund to modernize the auto component industry by providing interest subsidy on loans and investment in new plants and equipment. It has also provided export benefits to intermediate suppliers of auto components.
  • The sector has seen rising foreign investment in the last couple of decades. Foreign Direct Investment (FDI) inflow in the automotive sector stood at US$ 24.5 billion from April 2000 to June 2020. With the launch of 'Make in India' initiative, the government is expected to vitalize substantial additional investment in the auto ancillary sector.

How to Research the Auto Ancillaries Sector (Key Points)

  • Supply
  • Low for high technology products. Unorganized sector dominates the domestic component market due to GST (Goods and Services Tax) benefits. Generally, excess supply persists.
  • Demand
  • Linked to automobile demand. Export demand is linked to the increasing acceptance towards outsourcing.
  • Barriers to entry
  • High due to capital requirements, technology, OEM relationships, and distribution network to meet replacement demand.
  • Bargaining power of suppliers
  • Low with OEMs. Relatively high in the replacement market.
  • Bargaining power of customers
  • Companies operating in the export market face competition at a global level. At the domestic level, market structure is fragmented for a large number of ancillary products. Most companies adopt low cost and differentiation strategies. In some products (like batteries), only two or three companies control over 80% of the market.
  • Competition
  • Competition among industry players is intense as government has already deregulated the sector. Increasing number of foreign firms (Ford, Volkswagen, etc.) are increasing their presence.

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Financial Year '20

  • The Indian auto-components industry has experienced healthy growth over the last few years. The auto-components industry expanded by a CAGR of 6% over FY16 to FY20 to reach US$ 49.3 billion in FY20. However, in FY20, the revenue dropped by 12.8% YoY. Domestic OEM supplies contributed almost 51% to the industry turnover followed by exports and domestic after market at nearly 29% and 20%, respectively.
  • Despite weak turnover, exports of automobile components from India rose by 2.7% to US$ 7.5 billion in H1FY20 from the previous year wherein, Europe accounted for 32% of exports followed by the North America and Asia. H2FY20 was expected to be smooth, but it suffered a demand shock both in domestic and overseas market. Majorly, this shock was caused by the Covid-19 outbreak across the globe in Q4FY20. As a result, total exports of auto components dropped by 4.6% YoY to US$14.5 billion.
  • India's auto components aftermarket contributed 19.8% to the total industry turnover in FY20. The Drive Transmission and Steering product category accounted for 21% of the aftermarket share followed by 'Engine Components' and 'Electricals and Electronic Components' with 19% and 18%, respectively.
  • Production of two wheelers, passenger vehicles, commercial vehicles and three wheelers reached 21 million, 3.4 million, 0.8 million and 1.1 million respectively. Passenger vehicles had the highest share of total auto component supplies to OEMS in FY20, distantly followed by two wheelers and light commercial vehicles (LCV).
  • Major global OEMs made India a component sourcing hub for their global operations. Hyundai decided to source gasoline and diesel engines from its India manufacturing operations for domestic and global operations and planned to invest US$ 300 million for a new engine plant and metal pressing shop in India.
  • India also emerged as a sourcing hub for engine components with OEMs increasingly setting up manufacturing units in the country. In June 2019, Honda planned to invest Rs 6.3 billion in setting up a new production line for certain key engine components in Gujarat. This additional 600,000 capacity is expected to push up the company's total capacity to 7 million units.
  • The growth of global OEM sourcing from India and increased indigenization of global OEMs turned the country into a preferred design and manufacturing base. In July 2020, Bridgestone, a tyre maker, partnered with Microsoft to develop a tyre damage detecting system on a real-time basis.

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  • Market growth in the auto ancillary industry has a very large potential given the geographical spread, size of population and the current low penetration of automobiles in the country.
  • The emerging and middle-class segment is going to open new opportunities for businesses and the Indian automobile (auto ancillary) industry is likely to benefit from this growth. As the economic prosperity spreads across demographics, mobility will no longer be a luxury but a necessity for people.
  • Growth in the goods mobility segment will also drive growth of the sector. Improvements in road infrastructure would help this area of business which would result in additional business for auto component manufacturers.
  • Indian auto-component makers are well positioned to benefit from the globalization of the sector due to an increase in export potential. Industry turnover is anticipated to reach US$ 200 billion by FY26 and exports from the industry is expected to grow at an annual rate of 23.9% to reach US$ 80 billion by 2026. The Indian auto-components industry is set to become the third largest in the world by 2025.
  • The Government of India's Automotive Mission Plan (AMP) 2016-2026 will help the automotive industry to grow which will in turn will benefit the auto ancillary industry. Some of the plan's objectives are - To increase the contribution of the auto industry in the country's GDP to over 12%, to create 65 million incremental number of direct and indirect jobs and implement end of life policy for old vehicles.
  • With the Government of India's Aatmanirbhar (Self-Reliant) Mission, the automobile industry is looking to half its Rs 1 trillion worth of auto imports over the next 4-5 years. This will provide significant opportunities for existing and new auto component players to scale up.
  • Electrification has just started to take off in Indian automotive space and factors such as declining prices of batteries and supportive policies from the government are stimulating the growth of electric vehicles (EVs) in India. People carriers like buses, two- and three-wheelers, luxury passenger vehicles and light commercial vehicles could see maximum penetration by 2030, providing plenty of opportunity for the auto ancillary sector.
  • Connectivity is still in the early stages of adoption in India. A minuscule share of vehicles sold in India come with factory fitted connectivity features. However, the mass adoption of smartphones, coupled with low data costs, could aid connectivity features to proliferate and increase opportunities for growth for the auto ancillary sector.

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FAQs on the Auto Ancillaries Sector

How has the auto ancillary sector performed in the past decade and when is a good time to invest in the sector?

The auto ancillary (automobile) sector has been one of the sectors that has driven the stock market rally in the past decade. While it has lost some of the gains in the last two years, it has still given returns of more than 150%.

As the demand for auto ancillaries is dependent on the demand for automobiles which in turn is dependent on the economy, auto ancillary stocks are usually riskier - their fortunes are prone to economic booms and busts. For this reason, they are often called cyclical stocks. Generally considered an offensive tactic in investing, cyclical stocks can be used to generate high returns when the economy is doing well.

Therefore, the best time to buy such stocks (auto ancillary stocks) is at the start of an economic expansion and the best time to sell them is just before the economy begins to slow down. However, before selecting a stock, one must check whether the industry is due for revival or not.

To know more about the sector's past and ongoing performance, have a look at the performance of the NIFTY Auto Index and BSE Auto Index

Where can I find a list of auto ancillary stocks?

The details of listed auto ancillary companies can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

For a more direct and concise view of this information, you can check out our list of auto ancillary stocks.

Which auto ancillary stocks were the top performers over the last 5 years?

Suprajit Engineering, Automotive Axles and Schaeffler India were the top auto ancillary performers over the last 5 years in terms of sales and profit growth.

Suprajit Engineering's growth can be attributed to its strong market position and well-established relationships with all the major domestic two-wheeler (2W) and three-wheeler (3W) original equipment manufacturers (OEMs) with a market share of 75% whereas Automotive Axles growth can be attributed to its established position as one of the largest independent axle manufacturers in India, catering to several large medium and heavy commercial vehicle (M&HCV) OEMs.

Schaeffler India has also done well on the back of its position as one of India's major ball and rolling bearing manufacturers servicing the automotive and multiple core industrial segments.

To know which other companies performed well over the last 5 years, check out our entire list of top performers.

What kind of dividend yields do auto ancillary stocks offer?

There is no consistent trend of dividends across the industry, with different companies having different dividend policies.

That said, check out our list of top auto ancillary stocks offering high dividend yields.

Which are the auto ancillary stocks with the highest returns on capital employed (RoCE)?

Return on capital employed (ROCE) is a financial ratio that can be used in assessing a company's profitability and capital efficiency by determining how well the management is able to allocate capital for future growth. An RoCE of above 15% is considered decent for companies that are in an expansionary phase.

Sundaram Fasteners, Suprajit Engineering and Sundaram Clayton are the top auto ancillary stocks right now on the Return on Capital Employed (RoCE) parameter.

To know which other auto ancillary stocks offer great return on capital employed, you can check out the top auto ancillary stocks offering the best RoCE here.

Which are the best auto ancillary stocks to invest in currently?

Investing in stocks requires careful analysis of financial data to find out a company's true worth. However, an easier way to find out about a company's performance is to look at its financial ratios.

Two commonly used financial ratios used in the valuation of stocks are -

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