Are Auto Ancillaries a Favorable Bet as to Ease of Commodity Costs?

Despite strong revenues from auto subsidiaries in the April-June quarter of FY13, margins were under pressure due to higher commodity costs and logistic snarls.

However, with prices of key raw materials used in automobile manufacturing rising, amid concerns of an economic slowdown, analysts expect the respective companies to get some relief in the next few months.

Nishit Master, Portfolio Manager, Axis Securities says:The repeated cost of the commodity is positive. Chip Crunch’s worst issues lie behind. Gross margin to expand from Q2FY23.

New launches and demand post Covid-19 have also raised hopes of a revival in the auto ancillary sector.

According to reports, around 10 to 15 new passenger vehicles are being launched this year.

Separately, the government’s renewed push towards road safety could benefit auto subsidiaries involved in manufacturing safety equipment.

Gaurang Shah, Investment Strategist, Geojit Financial Services says noEW launch, increasing demand will help auto ancillaries. The companies concerned are likely to benefit from the new safety norms. The replacement market is a huge opportunity. Margins will improve with falling RM cost.

That said, high inventory costs could act as a bad game in the near term. Despite marginal relief in margins on account of softening commodity prices, we expect margins to remain lower in the July-September quarter of the current fiscal on account of higher inventory costs. We expect to see profitability from Q4 FY23 onwards.” Kunal Bhakt, Investment Advisor, First Water Capital Fund [AIF]

Auto ancillary companies such as Automotive Axles, Bosch, GNA Axles, Lumax Industries and Varoc Engineering have gained 36 per cent so far this year.

See also  London driver will 'park in hearts' if ULEZ expansion goes ahead

In comparison, the S&P BSE Sensex and Nifty 50 have gained over 1% during the same period.

As of today, investors will keep an eye on the European Central Bank’s interest rate stance.

Besides, rupee movement, crude oil prices and FII inflows will continue to guide the markets on Thursday.