Unlock 20-25% Growth: Why Auto Ancillary Stocks Are Set to Rally in the Next 3 Years

Investors looking to capitalize on the current momentum in the automobile sector may want to consider auto ancillary stocks, which are poised for significant growth in the coming years. With the auto sector experiencing a surge in volumes across all sub-sectors, including passenger vehicles, two-wheelers, and commercial vehicles, auto ancillary companies are well-positioned to benefit from this trend.

Why Auto Ancillary Stocks?

Auto ancillary companies have an added advantage as they cater to both domestic original equipment manufacturers (OEMs) and international players, who are establishing India as an export hub. This provides a significant avenue for growth, in addition to the domestic market. Many auto ancillary firms have also diversified their product offerings through organic expansion, acquisitions, or partnerships with international players.

Valuation and Growth Opportunities

From a valuation perspective, there are compelling opportunities in the mid-cap segment, with most companies in the ₹5,000 to ₹15,000 crore market cap band well-placed to deliver 20-25% earnings CAGR over the next two to three years. This growth will be driven by the increasing demand for auto components, both domestically and internationally.

Tyre Manufacturers: A Bullish Outlook

Tyre manufacturers are a specific segment within the auto ancillary space that looks particularly attractive. Factors such as lower crude prices, which reduce the cost of carbon black, and the platform-agnostic nature of tyres make the segment appealing. The recent stability in rubber prices has also eased margin pressures, making tyre companies an attractive investment opportunity.

• Lower crude prices reduce the cost of carbon black
• Platform-agnostic nature of tyres (required for both internal combustion engine and electric vehicles)
• Recent stability in rubber prices has eased margin pressures

Recommendation: CEAT

Among the tyre players, CEAT is a recommended stock, given its strong brand presence in the two-wheeler and passenger vehicle segments. As auto sales volumes pick up, the subsequent rise in both OEM and replacement demand will further bolster the tyre sector, making CEAT an attractive investment opportunity.

Remember, this is a perspective, not a prediction. It's essential to do your own research and consider your individual financial goals and risk tolerance before making any investment decisions.