India’s auto-component sector is set for continued earnings momentum, outperforming OEMs on profit growth despite slower revenue, a Jefferies report said. Improved profitability and an expanding business footprint are key drivers for the sector.
India’s auto-component sector could see continued earnings momentum as improving profit growth and a better consensus earnings outlook provide support to the industry, even as valuations have moved above their long-term averages, Jefferies said in a report.
Performance Against OEMs
The brokerage said auto-component companies outperformed original equipment manufacturers (OEMs) on operating profit growth in the June quarter, despite slower revenue growth. The improvement in profitability, along with an expanding business footprint, could remain an important driver for the sector going forward.
An analysis of 20 leading Indian auto-component companies by the brokerage showed aggregate revenue growth of 21 per cent year-on-year in the June quarter, excluding Motherson, compared with 29 per cent growth for auto OEMs excluding JLR. However, components companies delivered stronger profit growth, with aggregate EBIT rising 19 per cent YoY, against 10 per cent growth for OEMs.
OEM profitability was particularly affected by weakness in passenger vehicles, where EBIT declined 15 per cent YoY. In contrast, aggregate EBIT margins for auto-component companies remained broadly flat year-on-year despite a sharp increase in commodity prices. OEM margins declined by 1.5 percentage points, led by a 2.5 percentage-point decline in passenger vehicles.
Improved Earnings Outlook
Jefferies also pointed to a meaningful improvement in the sector’s earnings outlook. Of the 20 component companies covered in its analysis, nine saw their FY27 consensus EPS estimates upgraded by more than 3 per cent in the September quarter, while five faced downgrades. This marked a significant improvement from the June quarter, when only one company received an upgrade of more than 3 per cent, while 12 companies saw downgrades.
Strong Growth Prospects Despite Valuations
The brokerage said the improved earnings outlook reflects stronger growth prospects for the auto-component industry, alongside an expanding business footprint. While valuations for covered auto-component companies are above their long-term averages, Jefferies said the sector’s growth outlook remains strong.
The ability of component makers to translate revenue growth into stronger operating profit, while maintaining margins despite higher commodity costs, could support earnings performance in the coming quarters. The improvement in consensus expectations also suggests that market expectations for the sector are turning more constructive after a weaker June quarter.
Jefferies sees a combination of stronger earnings growth, resilient margins and expanding business opportunities supporting the auto-component sector’s outlook. (ANI)
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