The forgings components segment, which has a high exposure to the commercial vehicle (CV) segment, reported the highest revenue growth of 27% year-on-year (YoY) out of the 55 listed auto ancillary companies in India, according to brokerage Elara Capital's analysis of the Q3FY23 results. This segment was followed by suspension and braking products with the second highest revenue growth of 24.5%.
The companies that make up the brokerages' coverage of the forgings components segment are Bharat Forge Ltd, Mahindra CIE Ltd, MM Forgings Ltd, and RK Forgings Ltd. While, the suspension and braking companies under the brokerage's universe include Automotive Axles Ltd, Endurance Technology Ltd, Gabriel India Ltd, GNA Axles Ltd, Jamna Auto Ltd, and Wabco India Ltd.
On the earnings before interest, taxes, depreciation, and amortisation (EBITDA) growth front, the lighting led the pack with a growth of 60% YoY, followed by suspension & braking with growth of 40.9%, and forgings segment with a EBITDA growth of 35.2%.
According to the brokerage report, 29 out of 55 firms posted an EBITDA margin expansion quarter-on-quarter (QoQ). Average margin expansion of all 55 firms was 30 basis points QoQ. The top five companies include Bharat Forge, Federal Mogul, Apollo Tyres, Sona BLW and NRB Bearings.
"With OEM hiking prices to offset rising raw material prices, auto ancillaries have received benefits, as 37 out of 55 posted a gross margin expansion in Q3. However, it was partly offset as lower QoQ production volume curtailed operating leverage benefits with 37 out of 55 posting an QoQ expansion in other expenses-sales ratio and 40 firms posting an QoQ increase in employee expenses-sales ratio," said the brokerage.
The top picks of the brokerage includes Samvardhana Motherson International Ltd (SAMIL), Uno Minda, Apollo Tyres and Minda Corporation.
Additionally, the brokerage stated in its report that it anticipates domestic original equipment manufacturer (OEM) volume for passenger vehicles (PV) to increase by 11%, 2-wheelers by 9%, and medium and heavy commercial vehicles (MHCV) by 10% in FY24, while tractors are expected to stay flat on a strong base.
"Exports growth is likely to moderate, given the slowdown in Europe and the US while domestic replacement should grow in the mid-single digits," added the brokerage.
Energy prices are expected to decline in the upcoming quarter, though they will still be high. As a result, domestic companies with plants around the world (SAMIL, Mahindra CIE, and ENDU) expect Q4 margin to increase QoQ.
However, the brokerage stated in its report that given the increased level of uncertainty regarding the geopolitical and macroeconomic development in advanced Economies, the outlook for global demand remains cautious.
The current order bank should be able to sustain sales in H1CY23 despite the slow pace of incoming PV orders in Europe. Demand is strong in the US, while sentiment in China is improving following the Chinese New Year following a weak Q4CY22 hampered by COVID-related problems. Better chip availability has resulted in better supply chain circumstances.
"We expect domestic demand in FY24 to grow at a softer pace post strong growth across segments in FY23, with supply improving and normalcy almost returning post COVID-19," said the brokerage.
