Auto ancillary vs OEMs: Which industry is better for investment? Here’s what

The Indian automobile industry has experienced remarkable growth in recent years, driven by factors such as improving economic conditions, rising personal incomes, increased availability of semiconductor chips, and a drop in input costs. Collectively, these factors have contributed to a significant increase in overall volume within the industry.

However, domestic brokerage firm Motilal Oswal anticipates that the auto industry will likely take a breather in FY25, following the strong demand seen over the past two years. The firm expects two-wheelers, passenger vehicles, and commercial vehicles to post a CAGR of 9%, 6%, and 6%, respectively, from FY24 to FY26.

Also Read: FPI outflows driven by skewed selling in banks, domestic cyclicals see robust inflows

Conversely, Motilal Oswal believes the auto component industry is poised for significant long-term growth opportunities, with India emerging as a key beneficiary of the supply chain de-risking strategies adopted by global OEMs.

According to the brokerage, the domestic auto component industry is poised for sustained long-term growth, benefiting from a convergence of favorable factors. Among these factors is the emergence of the Indian component industry as a primary beneficiary of global OEMs’ supply chain diversification strategies, particularly amidst ongoing disruptions spanning the past 3–4 years.

Additionally, it said that the industry has consistently outperformed its core counterparts, propelled by increasing content due to premiumisation trends and the ongoing transition towards electric vehicles. Moreover, supportive government policies, notably the ‘Make in India’ initiative, further bolster the industry’s prospects by fostering a conducive environment for domestic manufacturing.

Also Read: Tata Motors vs M&M: Which auto major should you pick for the long term?

Lastly, it highlighted the country’s burgeoning status as an automotive hub for global OEMs reinforces the nation’s pivotal role in the global automotive landscape, promising continued growth and opportunities for the domestic auto component sector.

With these robust trends and its inherent core strengths, including global quality at a low cost and improving R&D skills, the auto component industry is projected to invest approximately $6.5–7.0 billion over the next five years.

This investment amount represents a doubling of the industry’s investment compared to the previous five years. In view of these tailwinds, the brokerage firm anticipates significant growth opportunities for the domestic auto component industry in the foreseeable future.

Indian auto industry: Near-term softness likely; long-term outlook intact

While PVs have witnessed a 17% volume CAGR over the last two years, 2Ws have reported a 14% volume CAGR in the same period. After rebounding strongly in the last couple of years, both 2Ws and PVs are anticipated to witness softer growth in FY25.

Motilal anticipates a 5% volume growth for passenger vehicles (PVs) in FY25, while projecting a 9% volume growth for two-wheelers (2Ws) during the same period. Conversely, it notes that commercial vehicles (CVs) experienced weak demand in FY24, remaining flat year-on-year over a relatively high base.

With an anticipated slowdown leading up to elections, Motilal expects a revival in CV demand to commence with a lag of a quarter.

Also Read: Hero MotoCorp stock jumps over 3% to hit new record high, crosses ₹5000 mark

“Thus, we forecasted CVs to…