A Buzz in the Auto

Ancillary Space
A Buzz in the Auto Ancillary Space
The automotive industry comprises of Commercial Vehicles (CV), Passenger Vehicles (PV), Three
Wheelers (3W) and Two Wheelers (2W). With annual production of 22.93 million units in FY22, India is
the fifth-biggest automobile market slated to become third-largest by 2030 in terms of volume, with Two-
Wheeler having a market share of 77% and Passenger Vehicle having a market share of 18% dominate
the domestic market. The industry is expected to reach USD 300 billion by 2026 backed by considerable
government assistance.
The auto and auto-ancillary industries have seen 4-5 years of slow development. However, positive data
during the previous year, with a healthy forecast for the next couple of years appears to be promising.
Currently, the auto ancillary industry contributes 2.3% to India’s GDP and as per IBEF report, it is
expected that by 2026, the industry could contribute 5-7% to the GDP. In FY22, the ancillary industry's
turnover was USD 56.5 billion and expected to reach USD 200 billion by FY26, supported by robust
export demand, which is expected to grow at a 24% annual pace to USD 80 billion by 2026.
The global automotive industry is witnessing a paradigm shift towards alternate solutions, and India is
investing in electric mobility on a grand scale. The industry's Electric Vehicle (EV) segment is witnessing
an extraordinary demand, to put this in context, over the last three years, EV sales have climbed by
approx. 23 times, with over 4,42,901 EV sold in FY23 (through December 9), compared to 19,100 in
FY20. Federal authorities are proposing a mobility choice that is Shared, Connected, and Electric with
the goal of reaching 100% electrification by 2030. According to an independent study conducted by the
Centre for Energy Finance, the Indian EV market is expected to reach USD 206 billion by 2030 if the
country maintains steady progress towards its ambitious 2030 target.
Exports could play a vital role in the growth of the industry as 25% of the production is exported annually.
Exports to Europe accounted for 31% of total exports in FY22, and new car sales across the continent
increased for the sixth month in a row in January, led by a strong demand in Spain and Italy, as supply
side difficulties ease and optimism for a post-pandemic recovery is high. Sales climbed in the United
States in January, despite the economic headwinds.
Overall, various factors such as (a) Strong demand drivers (i.e. growing working population, expanding
middle class spending capacity, traction in EVs, reduction in import dependence) (b) Competitive
advantage (i.e. relative cost efficiency of 10-25%, readily available workforce, availability of raw steel as
India is the world's second largest producer) (c) Export Opportunities, and (d) Policy Support (R&D and
product development, Automotive Mission Plan 2016-26, FAME scheme, PLI scheme, 100% FDI, among
others) would aid the industry growth in medium-to-long term.
In addition, the auto ancillary industry has been in the news recently owing to three acquisitions in a row.
On February 17, Minda Corporation announced the acquisition of a 15.7% stake (at Rs. 209 per share) in
Pricol Ltd. Lumax Auto Technologies agreed to purchase a controlling stake of 75% in IAC India on
February 18. During same month, on February 19, Samvardhana Motherson announced the acquisition
of the German cockpit-module manufacturer SAS.
Minda's stake purchase in Pricol from open market does not appear to be a negotiated transaction, and
further such action is anticipated in the future. This could take some time, although it is extremely
probable that this will increase emphasis on the auto ancillary industry as a lot of enterprises are making
shift from Internal Combustion Engine (ICE) to Electric.
invest4Edu Research

i4E INVESTKUL – TOP PICKS

Craftsman Automation Ltd.

Craftsman Automation began operations on a small scale in 1986 and has grown Recommendation BUY
to become a leader in precision manufacturing in diverse fields. It operates in three
business segments: automotive powertrain (52%), automotive aluminum (20%), CMP (Rs.) 3,290
and industrial & engineering (28%). The domestic market contributes 92% of Target Price (Rs.) 3,800
revenue, with the balance coming from exports. The top ten customers contribute Upside (%) 16%
58% of revenue. The company operates 12 facilities, including one flagship facility
in Coimbatore.
Stock Data
Investment Thesis
NSE CRAFTSMAN
Diversification Of Revenue Streams: Craftsman Auto has progressed from being Bloomberg CRAFTSMA IN
an export-oriented company focused on precision products for a wide range of end
industries to attaining market leadership in the domestic auto and industrial Reuters CRAF.NS
segments. Despite this, exports have seen a grown of 16% CAGR over last two 52W H/L 3,710 / 1,845
decades. Similarly, although being primarily a non-auto player (>80% of revenues
Mcap (Rs. Crores) 7,291
in FY 2004), it has a balanced exposure to autos (~60%) and non-autos (~40%).
Importantly, the sales are now evenly distributed, with no single end-user EV (Rs. Crores) 7,972
accounting for >30% of total revenue.
Dividend Yield % 0.11%
Well Established Relationships with Clients: It has long-standing ties with Outstanding Shares (Cr.) 2.11
several significant customers, including domestic and international OEMs and tier-
1 suppliers. It has improved wallet share with significant clients (58% of revenue
comes from the top 10 customers). Aside from the addition of new PV OEMs as Stock Performance
customers following the purchase of f DR Axion India Pvt. Ltd., consistent offtake
by important customers and an increase in business share with top M&HCV
players should help the company maintain its market position in the medium term.
As per CRISIL ratings, in FY23, the company is estimated to generate revenues of
~Rs.2,900 – 3,000 crores and strong double-digit growth is anticipated to continue
in FY24.

Demand Uptick in CVs to Aid Business Growth: The automotive powertrain

business accounts for 52% of the company's revenue, with the CV segment
accounting for more than 50%. The domestic market declined during FY20 and
FY21, but the industry is now experiencing a strong recovery, and according to Share Holding Pattern as of Dec’22
some reports, the industry is expected to grow at a CAGR of ~15% between
FY23E-25E, and the company, as a leader in CV machining, could capitalize on
the opportunity to grow the business. It would also benefit from recent orders for 16.0%
M&HCV trucks from multinational OEMs for export to Brazil, Japan, and Germany. Promoter
FII
Outlook and Valuation 15.8%
58.8% DII

Craftsman’s past track record of building a strong position in the industry gives the 9.3% Public
confidence of sustainability of the business. Also, Q4FY23 is expected to be better
in y/y and q/q terms. The acquisition of DRAIPL is expected to aid the business
growth from next fiscal year. Recovery in CVs and 2Ws, and visible drivers in other
segments could aid the business growth further. At CMP, the stock trades at 17x of
FY25E earnings.
invest4Edu Research

Exide Industries Ltd.

Exide Industries (Exide) designs, manufactures, markets, and sells the world's
Recommendation BUY
broadest range of lead acid storage batteries, ranging in capacity from 2.5Ah to
20,200Ah. Batteries are made for the Automotive, Power, Telecom, Infrastructure, CMP (Rs.) 173
Computer, Railway, Mining, and Defense industries. It is the market leader in India Target Price (Rs.) 218
and exports to more than 60 countries in six continents. It began producing lithium-
ion battery modules and packs for the Indian EV industry and grid-based Upside (%) 26%
applications. Furthermore, it has created a wholly owned subsidiary to establish a
plant for the manufacturing of lithium-ion cells. Stock Data
Investment Thesis NSE EXIDEIND
Bloomberg EXID IN
Industry Tailwinds to Aid Business Growth: The auto components industry
contributed 2.3% to India's GDP and directly employed 1.5 million people. Reuters EXID.BO
Furthermore, according to an IBEF report, the industry segment is predicted to 52W H/L 194 / 130
contribute 5.7% to India's GDP by 2026, providing a significant opportunity for auto
component players, particularly industry leaders. Exide has been in business for Mcap (Rs. Crores) 14,726
over 75 years, giving it an advantage in terms of expertise and a strong client EV (Rs. Crores) 14,789
base. We believe the company can capitalize on this potential and build the strong
business. Dividend Yield % 1.15%
Outstanding Shares (Cr.) 85
Multi-GW Lithium-Ion Cell Greenfield Manufacturing Facility to Push
Business in Long Term: Exide is setting up Li-ion facility in two phases of 6 GW
hour capacity in each phase, which will cost a total of Rs. 6,000 crores. The plant Stock Performance
would be utilized to manufacture battery cells for the Indian electric mobility and
stationary application industries. Phase-I is projected to be fully operational by
H2FY25. The demand environment, as well as the government's initiatives for both
industry and consumers, auger well for the overall demand picture. We believe that
the move will help Exide in the long run by giving them first-mover advantage in
cell manufacturing.

Margin Improvement in Next Financial Year: Exide's margins has been volatile
in the current fiscal year due to volatile input costs. However, lead prices have
lately cooled off, the impact of this may be felt beginning with the next fiscal year.
Other initiatives, such as price increases (Exide is normally a price setter in the Share Holding Pattern as of Dec’22
replacement battery industry), cost optimization, will boost margin improvement
beginning next fiscal year; consensus estimates suggest a gradual improvement in
operating margins of ~100 bps YoY in FY24. Promoter
23.5%
46.0% FII
Outlook and Valuation DII
19.6%
Public
As the auto ancillary industry is witnessing revival in demand on the back of ease
in supply side issues for OEMs, the demand for the Exide’s products could see an
uptick. Being a market leader, the company has an edge in terms of solid customer 11.0%
base and distribution network which would help in sustainability of the business.
Further, the new Li-ion plant provides a visibility to the long-term growth potential
on the back of demand from the EVs. At CMP, the stock trades at 12x of FY25E
earnings.
invest4Edu Research

Gabriel India Ltd.

Gabriel India, founded in 1961, is a significant brand name in the manufacture of
Recommendation BUY
ride control devices like shock absorbers, struts, and front forks. As of FY22, it has
seven plants in Parwanoo, Khandsa, Dewas, Sanand, Nashik, Pune, and Hosur. It CMP (Rs.) 153
has a strong presence in OEMs, aftermarkets, and exports. Its clients include Tata Target Price (Rs.) 219
Motors, Ashok Leyland, Mahindra & Mahindra, TVS Motor, Hyundai Motor, Maruti
Suzuki, and Bajaj Auto, among others. Upside (%) 43%

Investment Thesis Stock Data

Strong Market Position: The company has a high brand recall and is one of NSE GABRIEL
India's largest manufacturers in the vehicle suspension component industry, with a Bloomberg GABR IN
presence in OEMs, aftermarket, and overseas markets. It leads the aftermarket in
India with a market share of more than 40%, backed by solid logistics network that Reuters GABR.BO
includes 664 dealers and 12,000 merchants. Gabriel is expected to benefit from e- 52W H/L 201 / 102
2W and e-3W due to its market position and technological advantage. It has
technology collaborations with KYB (Japan) for the PV segment and KONI Mcap (Rs. Crores) 2,285
(Netherlands) for the CV segment, where it is working on cutting-edge technology EV (Rs. Crores) 2,195
that might be applied in Indian markets.
Dividend Yield % 0.97%
Marquee Customer Base: Having extensive expertise in the 2W and 3W Outstanding Shares (Cr.) 14.4
segments, Gabriel has become a well-established player in the segment,
accounting for 65% of sales in FY22. TCS Motors, Yamaha, and Bajaj Auto are the
top three customers. It also includes OLA Electric, Ather, and Royal Enfield among Stock Performance
its 2W/3W clientele.

Gabriel is the preferred partner for several OEMs in PV and has a strong market
position in the aftermarket. Maruti Suzuki, Volkswagen, and Mahindra & Mahindra
are the top three clients in the segment; the PV client base also includes Tata
Motors, Toyota, and Renault, among others. CV clients include Ashok Leyland,
Daimler, DAF, Force Motors, Tata Motors, Mahindra Rise, and others. Revenue
stability is provided by a varied clientele spread across segments.

Increase in Exports to Push Business Growth: Gabriel's export revenue Share Holding Pattern as of Dec’22
climbed 56% YoY and 18% QoQ during Q3FY23. Total exports were Rs. 74 crores
in 9MFY23, and are expected to reach Rs. 100 crores in FY23E. Exports
accounted for 4% of the company's income in FY22, with management is aiming to
Promoter
increase this to ~10% in the next 3-4 years; Gabriel is focusing on Latin America 31.2%
and Africa to increase exports. The business is expected to grow in the medium-to- FII
long term with a significant market share and marquee client base, along with DII
55.0%
China+1 theme playing out.
11.2%
Public

Outlook and Valuation 2.6%

We believe, Gabriel could be one the major beneficiaries in growing trend in

adoption of EVs, especially in 2W segment. The company has the required
expertise along with strong brand and technology to leverage the opportunities in
auto industry. The strong clientele of the company provides a comfort in stability of
the business. Also, the endeavor to push exports an additional layer in the future
growth. At CMP, the stock trades at 11x of FY25E earnings.
invest4Edu Research

Lumax Auto Technologies Ltd.

Lumax Auto Technologies produces a wide range of goods including integrated
Recommendation BUY
plastic modules, 2W/3W lights, chassis, gear shifter, shift towers, emission
systems, seat frames, oxygen sensors, electric devices and components. In India, CMP (Rs.) 267
it is the market leader in the design, testing, and manufacturing of gear shift levers. Target Price (Rs.) 291
It has a strong Pan-India distribution network and 17 manufacturing sites in all
major auto clusters in India. Bajaj Auto, Honda Motorcycles and Scooters, Upside (%) 9%
Mahindra & Mahindra, Maruti Suzuki, Tata Motors, and Toyota are among some of
its key customers. Stock Data
Investment Thesis NSE LUMAXTECH
Bloomberg LMAX IN
Strong Market Position and Strong Client Relationships: Lumax has a strong
market position in automotive lighting products, as well as strong ties with Reuters LUAT.BO
important customers such as Bajaj Auto, Maruti Suzuki, and Lumax Industries. The 52W H/L 312 / 141
group primarily supplies 2W and 3W lighting products, 2W chassis to BAL, and 4W
gear shift assemblies to MSIL, Toyota Motor, Honda Motor, and Renault-Nissan. Mcap (Rs. Crores) 1,787
EV (Rs. Crores) 1,848
To diversify its product portfolio, the business has begun supplying swing arms for
2W and trailing arms for 3W. To increase aftermarket revenue, it has been Dividend Yield % 1.33%
expanding its distribution network and increasing its product offering. A network of Outstanding Shares (Cr.) 6.8
400+ distributors for aftermarket sales in India further reinforces the company's
position. Furthermore, the company continues to seek JVs to supplement its
product portfolios and grow regionally. Stock Performance

Acquisition of IAC India to Increase Product Diversify and Support Long

Term Growth: Lumax Auto Tech has acquired 75% stake in IAC group’s India
business, IAC India, at an equity value of Rs. 587 crores; IAC group to hold
balance 25% stake. Lumax’s existing expertise in lighting and plastics provides an
opportunity to combine strengths across lighting, plastics and interiors to provide
complete solutions. Lumax will leverage the deal to enhance kit value per vehicle.
Further, Lumax would leverage IAC technological capabilities and engineering
center across products. As per the management, the acquisition is EPS accretive.
Share Holding Pattern as of Dec’22
Order Book: Lumax Auto Tech's current order book is at Rs 500 crore, with 90%
of that is from new business and the remainder from replacement business. The
firm has benefited from new OEM launches since it has resulted in growth of order
5.6% 19.0% Promoter
book. According to management, the increased product categories have resulted
in increased vehicle content. Whilst the management has not disclosed IAC India's FII
order book figures, it has said that it will increase by double digits in FY24.
56.0% DII
19.4%
Public
Outlook and Valuation

We anticipate that the firm will be able to strengthen its margin profile with the
recent purchase of IAC India, and that the total deal will be earnings accretive. Its
diverse product categories, solid client base, and strong segment diversity help to
sustain the business profile. On the margins front, management believes it can
maintain the current levels and grow it gradually. At CMP, the stock trades at 14x
of FY25E earnings.
invest4Edu Research

Sona BLW Precision Forgings Ltd.

Sonacoms is an automotive technology company engaged in the business of
Recommendation BUY
designing, manufacturing, and supplying of mission-critical, high-quality complex
systems and components, for electrified and non-electrified powertrain segments. CMP (Rs.) 455
It has diversified product portfolio including differential assembly, micro/plug-in Target Price (Rs.) 560
hybrid starter motors, differential gears, conventional starter motors, traction
motors, etc. Upside (%) 23%

Investment Thesis Stock Data

Strong Order Book: Sonacoms had an order book of Rs. 23,800 crores as of NSE SONACOMS
Dec’22 (11.2x of FY22 Consolidated Revenue). During Q3FY23, it added orders Bloomberg SONACOMS IN
worth Rs. 4,200 crores and executed orders worth Rs. 900 crores. 73% of the
orderbook is contributed by EV (31 programs across 21 customers). 9 of the 41 EV Reuters SONB.NS
programs are already in serial production. 52W H/L 707 / 397

A Solid EV Bet: Electrification is the company’s approach to market. Its position in Mcap (Rs. Crores) 27,122
the segment is strengthening as a result of an expanding customer base, EV (Rs. Crores) 27,220
diversified global presence, and increasing presence in EV, as evidenced by the
share of BEV, which has grown 22x in 4 years, with absolute BEV revenue growth Dividend Yield % 0.33%
of 34x. while, it dominates Indian market in differential gears, its global market Outstanding Shares (Cr.) 58.5
share in differential gears (from 4.5% in 2019 to 6.3% in 2021) and starter motors
(from 2.5% in 2019 to 4.6% in 2021) is gradually increasing.
Stock Performance
Diversified Revenue Mix: In last three years, the revenue share from BEV has
increased from 2% in FY20 to 25% during 9MFY23. BEV continues to be its
dominant theme and dependence on ICE continues to reduce from 27% in FY20 to
17% during 9MFY23. Overall, the revenue mix has improved in last 2-3 years. By
geography, the revenue mix is balance, where North America contributes 45%,
followed by India at 29%, Europe at 18%, Asia (Excl. India) at 7% and balance by
RoW. By vehicle segment, 69% is contributed by PV, followed by 14% from CV,
13% from OHV, and balance 4% by E2W/E3W.

Focus On R&D To Develop New and Innovative Systems and Components:

Share Holding Pattern as of Dec’22
The company has built in-house capabilities for developing embedded systems,
software, and integration. The capabilities have enabled it to deliver evolving green
technologies for future mobility. It intends to capitalize on the rising trend in
revenue realization per vehicle by increasing electrification and investing 10.8%
Promoter
continuously in R&D.
FII
24.4%
52.5% DII
Outlook and Valuation
11.3% Public

On the back of strong order wins and overall solid order book, we see strong
revenue visibility. Sona BLW remains a solid EV bet over the medium-to-long-term
having diversified revenue base and strong R&D capabilities. This, along with
growing customer base, diverse and increasing product portfolio, and the global
scale would aid the business growth in coming years. At CMP, the stock trades at
37x of FY25E earnings.
invest4Edu Research

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DISCLOSURE OF INTEREST
Name of the Research Analyst: Aditya Agarwala
Dinesh Saney

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