Auto ancillary stocks shift into top gear but caution lights flash

Auto ancillary companies have generated higher investor interest over the past month amid buoyancy in the broader market. However, investors need to be cautious since the sector may face pressure due to muted demand for commercial and passenger vehicle (CV and PV) demand. Of the 22% increase posted by the ET-Auto Ancillaries index in the past three months, 13% was in one month, reflecting improved traction in these stocks.

For a sample of 22 auto component companies, half have posted year-on-year revenue growth in the March quarter in double-digits. However, only eight of them have recorded double-digit growth in net profit. While seven companies posted double-digit growth in operating profit before depreciation and amortization (EBITDA), operating margin expanded for eight companies.

The two-wheeler companies reported a slower volume growth in the second half of FY25 after a strong growth in the first six months according to Motilal Oswal Financial Services (MOFSL). Tractors was the only segment that witnessed a strong demand recovery.

The automobiles sector saw earnings downgrades for FY26 as margin may take a hit amid rising input costs and tepid growth visibility. “The recent appreciation of the rupee against the dollar is a key monitorable for exports-focused companies. Given these factors, FY26 is expected to be a year of modest earnings growth for most companies under our coverage,” said MOFSL.

The margin outlook for global original equipment manufacturers (OEM) adds to the uncertainty. According to Elara Capital, top international auto makers including Mercedes-Benz, Porsche and Ford have either downgraded or suspended guidance for 2025, citing tariff risks, market share loss in China, and margin headwinds. This may impact Indian auto parts suppliers with global linkages like Bharat Forge, Sona BLW, and Motherson Sumi.

A possible turnaround in the entry level demand for bikes driven by the rural market after a lacklustre trend in the recent quarters, new product launches and the vehicle scrappage policy hold the key for a demand uptick in the near term, according to YES Securities. It expects gross margins to be under marginal pressure due to a possible material inflation, cushioned partially by favourable product mix in the first half of FY26. In addition, the income tax relief is anticipated to boost demand, especially for price-sensitive segments.

With fundamentals showing signs of fatigue, analysts advise caution in near term. Stocks with strong domestic demand drivers, rural exposure, and EV-related product lines may hold up better, but margin pressures and global uncertainties could limit further upside. According to MOFSL, the recent stock market rally has led to the normalisation of valuation multiples which had fallen in the recent past. “The earnings outlook for the sector appears benign, given the modest volume growth outlook and expectations of rising input cost pressure,” the brokerage stated in the report, highlighting that it prefers Endurance Technologies and Happy Forgings among auto ancillaries stocks.