Auto Components

Updated: Dec 8, 2021

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Growthway Investments By- Mukund Mundra

About the Sector –

  • India is one of the most promising global automotive markets leading in PV, UV , 2W and vans and is expected to reach USD 300 Bn by 2026 with a CAGR of 15% from its current revenue of USD 118Bn

  • The size of India's auto component industry is USD 57 Bn (organized sector only) and expected to reach USD 200 Bn by 2026 led by a rebound in OEM production.

  • It currently contributes to 2.3% of India’s GDP and expected to increase 5-7% of GDP by 2026.

  • CAGR of the industry stood at 13% over the period FY 14 to FY 19 and with slowdown in the auto sector in FY20, it saw a degrowth of 13% in FY21

  • India remains net importer of most auto components. Key learnings from China and Korea auto component industry show government’s role is pivotal in developing the auto ancillary industry

  • The number of manufacturing units in the unorganized sector (10000+ players) are far higher than those in the organized one (800-1000 players)

  • Although lesser in number, the organized sector accounts for 80-85 % of total industry turnover

About the Industry

Over the past decade, key drivers of auto ancillary growth have been through consolidations, product and geographical expansion, and segment-wise expansion apart from a few restructuring-led revenue growth outperformance.

Key Demand Drivers

  • Emerging global sourcing hub

  • Electric vehicles push, Scrappage policy

  • Growing working population and expanding middle class

  • Favorable trade policy with 100% FDI allowed and no restrictions on import - export

  • Policy support for R&D and product development by establishment of NATRiP

Key Industry trends –

  • Constantly shifting market dynamics due to changing manufacturing locales, customer demands, operating models, and priorities

  • The changing needs of OEMs, who are likely to want different, more agile, and rapid component inputs as demand, timelines and processes keep shifting.

  • The current semi conductor chip shortage issue has made major automobile players rethink their supply chain strategies to “China plus one strategy” to de-risk the same. This can be seen as opportunity for Indian players to strike strategic alliances, especially for access to technology, while offering them the advantage of their deep understanding of the domestic market.

  • Technological improvements and discontinuities that are already starting to change revenue pools, trigger new competition and invite new forms of cooperation. Several global Tier-I suppliers have also announced plans to increase procurement from their Indian subsidiaries.

  • Improving product development capabilities by setting up R&D operations & laboratories. The growth of OEM sourcing from India & increased indigenization of global OEMs is turning the country into a preferred designing and manufacturing base. R&D cost as a % of sales for listed players ranges between 1 – 2%

  • An evolving regulatory and trade environment forming the backdrop for it all.

  • The automotive industry is bracing for electrification of vehicles as the world targets sustainability and zero emissions. This is one of the mega trends shaping the industry bringing in new companies which might be unrelated to the industry. This would impact engine & engine components, exhaust system and other related components as this would be replaced by the battery.

Covid Implicaions

  • The growth of auto component by revenue is expected to be 16-18% in FY 22 after seeing a decline by 13% in FY 20 and 6% in FY 21. This is due to a 22-24% growth in OEM demand, which is fueled by a robust rebound in commercial vehicle (CV) and passenger vehicle (PV) production.

  • Many auto OEMs and car ancillaries have shut down plants as a restrictive measure and cost-cutting strategy, while car stores across the country have been closed due to regional limitations set by various states and municipal governments to combat the pandemic.

  • As medical and hygiene expenses have gone high, people are unlikely to spend on large ticket discretionary such as vehicles. Out of which two-wheeler segment is expected to be the impacted most as their target customer is affordability.

  • Personal mobility cars and EV would be the two major demand drivers for the industry.

  • The Automotive Component Manufacturers Association (ACMA) and the Society of Indian Automobile Manufacturers (SIAM) are collaborating to improve deep localization in the car component business, boosting India’s worldwide pricing competitiveness.

  • This would not only help us increase exports, but it will also help us reduce the import of sub-stand components that are imported only because of their low price.

  • One of the threats to the industry is the shortage of semi-conductors. Following the pandemic's breakout, there is a global scarcity of semiconductors due to increased demand for laptops and cellphones. It is projected that the shortfall would last until September 2021. Due to supply chain disruptions, sales might be reduced by 15% over this period.

  • To enhance the cash cycles and meet short-term liquidity demands, large-listed car and auto component firms transferred the financial weight of the pandemic lockdowns to their smaller suppliers by postponing payment.

  • With pick up in vaccination drives and ease in restrictions in some parts of the country, the growth curve is expected to rise.

Top 3 stocks –

  • Maruti Suzuki

  • Tata Motors

  • Hero Motocorp

3 Under Valued Stocks

  • Ashok Ley Land

  • Apollo Tyres

  • Motherson Sumi

Global Impact and Future

  • With plummeting vehicle sales in the backdrop, and the industry being compelled to make fresh investments to meet the new safety and emission norms, the last year has been a rather difficult one for the automotive industry in India. The situation has been further compounded by the outbreak of the Covid-19 pandemic and the ensuing lockdown.

  • It is estimated that the components sector faced a production loss of ₹1,000-1,200 crore during the lockdown in Q1. The vehicle industry recorded zero sales during the same period, and that had a resonating effect across the entire value chain.

  • A resilient aftermarket: As more people postpone buying new vehicles and use less public transport in the present scenario, repairs on current and second-hand vehicles could provide a window of opportunity for the automotive aftermarket

  • The rapidly globalizing world is opening newer opportunities for the transportation industry, especially while it makes a shift towards electric, electronic and hybrid cars, which are deemed more efficient, safe, and reliable mode of transportation. However the pace of transition is expected to be gradual with ICE engines remaining dominant in the near to medium term , particularly in India.

  • Over the next decade, this will lead to newer verticals and opportunities for auto-component manufacturers, who would need to adapt change via systematic R&D.

  • As per ACMA forecasts, automobile component export from India is expected to reach US$ 80 billion by 2026.

  • The Indian auto-components industry is set to become the third largest in the world by 2025. Indian auto-component makers are well positioned to benefit from the globalisation of the sector as export potential could be increased further.

  • The auto components industry is expected to follow OEMs with adoption of EV technology creating new opportunities for them. The mass conversion to EVs may generate USD 300 Bn domestic market for EV batteries in India by 2030