Uno Minda, Endurance Tech, Apollo Tyres shares: Auto ancillary stocks that Elara likes

Elara Securities, which analysed 56 listed auto ancillary companies post FY23 results, said improving operations with normalising production in H2FY23 led to better working capital, though partly offset by the rise in overall capex, leading to positive free cash flown (FCF) generation for the sector. In a sectoral note, it said 50 of 56 auto ancillary companies that it analysed posted positive FCF in FY23, led by Samvardhana Motherson International (SAMIL), Apollo Tyres and Tube Investments. The brokerage sees up to 33 per cent potential upside on the counters, based on June 8’s closing prices.

It noted that cumulative fee cash flow (FCF) for the sector in FY23 jumped to Rs 11,200 crore against a negative FCF of Rs 3,060 crore in FY22, as the domestic brokerage picked SAMIL, Uno Minda, Endurance Tech and Apollo Tyres as it preferred picks in the sector. The brokerage has price targets that suggest up to 33 per cent upside on these four stocks.

"Within the auto ancillary space, our top picks are SAMIL (SMP turnaround; product portfolio beneficiary of mega trends), Uno Minda (rising content per vehicle; benefits from mega trends in LACE effect), Endurance Tech (revival of 2W) and Apollo Tyres (margin expansion)," it said.

Here’s what Elara said on the sector companies:

Revenue growth

Elara said among the 56 companies, top five firms in terms of Q4 revenue growth stood at Craftsman Automation (up 49 per cent YoY), Swaraj Engines (up 49 per cent YoY), Suprajit Engineering (up 38 per cent YoY), Sona BLW Forgings (up 35 per cent YoY) and SAMIL (up 31 per cent) YoY.

Ebitda growth

Minda Uno was among top-five companies in terms of Ebitda growth at 57 per cent. Automotive Axles (up 91 per cent YoY), ZF CV Systems (up 86 per cent YoY), Lumax Industries (up 54 per cent YoY) and Varroc Engineering (up 52 per cent YoY) were other companies reporting solid Ebitda growth in FY23.

Auto ancillaries with over 40 per cent exposure to two-wheelers and with less risk from EV disruption from product portfolio perspective included Gabriel India, Endurance Tech, Uno Minda, Minda Corp, Suprajit Engineering, Fiem Industries, Pricol, Sandhar Tech, TVS Srichakra, it said.

Capex spend

"We have analysed FY23 and Q4FY23 results of 56 listed auto ancillary players to assess their performance. Even as capex spend at 5.4 per cent of overall FY23 revenues was lower than 6 per cent in FY22 (eight-year average of 6.8 per cent), absolute capex spend was the highest since FY19 at Rs 19,800 crore, up 11 per cent YoY. FCF generation improved on working capital improvement due to easing supply chain challenge,' Elara said.

ROE leaders

Ancillaries that have an eight-year median ROE of 14.7 per cent or higher and P/BV of 4.5 times or lower, are SAMIL, Amara Raja, Minda Corporation, Gabriel, LG Balakrishnan, MM Forgings, Lumax Industries, NRB Bearings, GNA Axles and Talbros.