India’s Auto Component Sales Surge by 6.5% in H1 2023
Introduction
The Automotive Component Manufacturers Association of India (ACMA) has reported a significant 6.5% increase in domestic auto component sales, amounting to $36.1 billion during the first half (April-September) of the financial year 2023. This notable growth is driven by the strong consumer preference for vehicles equipped with premium features, safety enhancements, and advanced technologies across various automobile segments.
Driving Factors for Auto Component Sales Growth
The surge in demand for auto components is primarily fueled by the following factors:
- Shift Towards Utility Vehicles: SUVs now constitute 57% of car sales, and medium/heavy trucks and buses account for 35% of overall truck sales. This shift reflects consumers’ increasing preference for vehicles offering enhanced comfort, spaciousness, and advanced technology, which necessitate the use of additional and complex parts supplied by component manufacturers.
- Mid-Range Motorcycles Upgrade: Even mid-range motorcycles are experiencing a shift towards higher 200-250cc variants. In response to this trend, auto parts suppliers are making substantial investments to upgrade their manufacturing capabilities within the country, reducing the reliance on imports.
- Government Regulations: Government regulations pertaining to safety, emissions, and environmental standards are also driving innovation in auto components, leading to increased revenues for component manufacturers.
Impact on Retail Investors
Investment Opportunities
The upward trend in component sales, driven by the demand for feature-rich automobiles, presents investment opportunities for retail investors. Key beneficiaries include:
- OEM Vehicle Makers: Companies producing premium models, such as Mahindra & Mahindra (known for SUVs) and Bajaj Auto (with the Pulsar 250 models). These companies are expected to experience improved profitability as their revenue share in critical categories expands.
- Auto Ancillary Stocks: Companies specializing in manufacturing components such as sensors, lighting, infotainment, and connected car systems, including Minda Industries, Sandhar Technologies, and Lumax Auto, are well-positioned to benefit from increased order flows and improved margins. These companies are likely to focus on research and development and foster partnerships with OEMs to meet the requirements of the latest vehicle variants.
In the short term, positive sentiment is expected around stocks within the automotive sector, given the outlook of sustained growth in the coming quarters. However, retail investors are advised to conduct thorough analyses of individual company exposures, client acquisitions, and capabilities before making specific investment decisions based on the current demand environment.
Impact on Industries
Beneficiary Industries
The growing demand for vehicles equipped with comfort, safety, and connected features has positive implications for various industries and segments within India’s automotive value chain:
- Auto Ancillaries: Suppliers of components for infotainment systems, vehicle tracking equipment, lighting solutions, sensors, and emission control devices are poised for significant growth, particularly those focused on these categories. Stocks like Motherson Sumi and Minda Industries are expected to thrive.
- Automotive Software: As vehicle complexity increases, there is a rising demand for software integration, testing, and validation services from OEMs and tier-1 suppliers. This trend benefits IT service providers and engineering specialists like KPIT and Tata Elxsi.
- Alloy Wheels, Auto Glass, Batteries: The increased adoption of vehicles derived from heavy truck and bus platforms for personal mobility is expected to drive demand in these categories. Brands like Steel Strips Wheels, Sandhar Amkin, and Exide are well-positioned to benefit.
- Auto Electronics: The greater electronic content in vehicles (up to 50% of vehicle cost) is anticipated to boost component demand and require design and testing capacities. Dixon and Amber Enterprises are poised for growth in this area.
Long-Term Implications
Potential Long-Term Benefits
- Development of Comprehensive Automotive Technologies Ecosystem: India is expected to develop a comprehensive ecosystem for advanced automotive technologies encompassing research and development, manufacturing, and validation capabilities. This would reduce the country’s reliance on importing sophisticated components over the next 5-10 years.
- Affordability and Accessibility: As vehicle production scales up in premium categories, vehicle costs are likely to decrease, making modern safety and comfort features more affordable and accessible to the masses in the long run.
Potential Long-Term Negatives
- Investment and Lead Time: Significant investments and time are required to nurture skills and establish technical know-how clusters for technologies such as Advanced Driver Assistance Systems (ADAS) and connectivity solutions. There is a risk of falling behind in the race for next-generation innovations if inertia sets in.
- Changing Employment Dynamics: Automation and the adoption of Industry 4.0 practices may alter employment dynamics in the auto sector. Widespread reskilling of the labor force may be required to prevent extended periods of transitional joblessness or inequality.
Short-Term Considerations
Short-Term Benefits
- Component manufacturers can expect revenue visibility for the next two years with sustained order flows, driven by continued consumer demand for feature-rich premium vehicle variants across various segments.
- Auto ancillary stocks, which are currently trading at reasonable valuations, present attractive opportunities for retail investors to ride the upcycle. There is potential for a 20-30% upside over a 12-24 month horizon based on the growth outlook.
Short-Term Negatives
- OEMs relaunching vehicle models packed with new features may encounter temporary supply constraints or delays in sourcing specialized parts until vendors can augment their capacities. This could affect sales volumes in the short term.
- Demand fluctuations are possible based on interest rates for auto loans, although this is less likely to affect premium category buyers. Slightly higher Equated Monthly Installments (EMIs) could act as a short-term deterrent.
Companies Impacted by Auto Parts Sales Growth in India:
Indian Companies Gaining:
Tier-1 Auto Parts Suppliers:
- Companies like Bosch, Bharat Forge, Motherson Sumi Systems, and Minda Industries are major suppliers for larger vehicles and feature-rich components, positioning them to benefit from increased demand.
- Growing market share due to import substitution efforts could further boost their market share and profitability.
Utility Vehicle (UV) Parts Manufacturers:
- Companies specializing in parts for SUVs and larger vehicles, like Mahindra CIE Automotive and Bharat Gears, stand to gain from the rising share of UVs in the market.
- Strong performance and positive outlook might attract investor interest and boost their stock prices.
Two-Wheeler Parts Suppliers:
- Growing demand for premium motorcycles with larger engine capacities could benefit companies like TVS Motor Company and Sundaram Industries, which have strong presences in this segment.
- Increased sales and profitability could improve market sentiment towards these companies.
Auto Component Exporting Companies:
- Despite global uncertainties, continued growth in exports could benefit companies like Endurance Technologies and Lumax Industries, diversifying their revenue streams and mitigating domestic slowdown risks.
- Positive export performance could enhance investor confidence and potentially boost their stock prices.
Indian Companies Potentially Losing:
Low-Cost Two-Wheeler Parts Manufacturers:
- The shift towards premium motorcycles might decrease demand for parts for smaller budget motorcycles, potentially impacting companies focused on this segment.
- Potential slowdown in this segment could negatively affect these companies’ performance and market sentiment.
Importers of Auto Parts:
- Increased focus on domestic sourcing and import substitution efforts might negatively impact companies heavily reliant on imported parts, particularly those that lack strong domestic manufacturing capabilities.
- Reduced import volumes could decrease their revenue and potentially harm their profit margins.
Global Companies:
Limited Impact: This growth primarily benefits domestic Indian companies. However, global auto parts giants with Indian operations might see increased demand for their components and technologies, contributing to their overall growth.
Potential Supply Chain Opportunities:
- Global suppliers of advanced technologies and materials for feature-rich vehicles might see increased demand as Indian automakers embrace innovation.
- This could create lucrative opportunities for collaboration and partnerships with Indian companies.
Overall Market Sentiment:
- The news is generally positive for the Indian auto parts sector, indicating continued growth and opportunities.
- Companies benefiting from the trend, particularly Tier-1 suppliers, UV specialists, and some exporters, might see positive market sentiment and potential stock price increases.
- Companies facing headwinds from import substitution and changing consumer preferences might see negative impacts on their market sentiment and performance.
Remember: This analysis is based on the available information and individual company impacts can vary depending on their specific product profiles, financial performance, and adaptation to market changes. Conducting further research and consulting a financial advisor are always recommended before making investment decisions.
I hope this analysis is helpful! Let me know if you have any other questions.
Proper Citation:
ET Bureau. (2023, December 21). Auto Parts Sales Rise 6.5% in H1 as Buyers Turn to Feature-rich Vehicles.