India's Auto-Component Sector: Riding High on Profit Waves

India's auto-component sector shows robust earnings momentum, driven by improved profitability and favorable earnings outlook, outperforming OEMs despite higher valuations. Analysts cite strong profit growth and expanding opportunities as key drivers for future success.

The Indian auto-component sector is witnessing continued earnings momentum, buoyed by enhanced profit growth and a favorable earnings outlook, according to a report by Jefferies. Despite the sector's valuations exceeding historical averages, the industry's profitability trajectory remains strong.

Analysis by Jefferies of 20 prominent Indian auto-component firms reveals a 21% year-on-year revenue growth in the June quarter, excluding Motherson, compared to the 29% growth in automotive OEMs excluding JLR. Notably, auto-component firms surpassed OEMs in profit growth, with aggregate EBIT climbing 19% YoY against OEMs' 10%. OEMs suffered from weaker profitability in passenger vehicles, where EBIT dropped 15% YoY, while auto-component companies maintained stable margins amid rising commodity costs.

The report highlights an improved earnings outlook for the sector, with nine of the 20 analyzed component firms receiving substantial FY27 EPS estimate upgrades in the September quarter, contrasting with the June quarter where downgrades predominated. Enhanced revenue-to-profit conversion, resilient margins, and expanding opportunities underpin the sector's promising future, the report notes.