Credit Suisse's India Stock Bets For Global Auto Ramp-Up

Automotive component makers, aided by the production-linked incentives, are better placed than vehicle manufacturers as output recovers globally, according to Credit Suisse.

Within the auto segment, parts suppliers' stocks have been hit the most by macro challenges—down 32% vs a 16% fall for auto parts companies, according to report by the research firm. Since original equipment makers' production is influenced a lot more by model cycles and the success or failure of specific models, auto parts suppliers are a good alternative to play the global passenger vehicle ramp-up ahead, Credit Suisse said.

“Auto parts stocks in India provide a relatively good haven amidst the macro uncertainties,” the report said.

The brokerage is initiating coverage on Samvardhana Motherson International Ltd. and Bharat Forge Ltd. with "outperform" ratings and Sona BLW Precision Forgings Ltd. with a "neutral" rating.

The report said well-diversified suppliers are better suited to capitalise on global production revival over 2022 and 2023. It also forecast India to be an outlier pocket of growth accounting for about 21% of global growth in volumes through 2030.

“Indian suppliers have outpaced OEMs' growth in the last five years by 200bp p.a. (pre Covid), and stand to gain further share as the world moves towards supply chain diversification and India brings support for domestic manufacturing with $7 billion of incentives support over FY23-27 under the production linked and other schemes.”

• Credit Suisse also expects Samvardhana Motherson International, Sona BLW and Bharat Forge to see strong a growth over FY22-24.

• It forecasts revenue CAGR of 35%, 15%, and 13% over FY22-24 for Sona BLW, Samvardhana Motherson and Bharat Forge, respectively.

Here's what Credit Suisse has to say about auto part makers' stocks:

Samvardhana Motherson International

• Initiates coverage with an 'outperform' rating and target price of Rs 166, a potential upside of 27% from Tuesday's close.

• Well-placed to benefit from the global auto recovery, with a diversified product and customer portfolio.

• Sitting on an order book of €16 billion, as of March 2022, which provides visibility on future growth.

• Could be a larger-than-expected beneficiary of electrification.

• Margins to recover from lows across businesses.

• Its products, such as plastic parts, wiring harness, vision systems, etc., are used in both ICE and EVs making it less vulnerable to the electric vehicle transition.

Bharat Forge

• Initiates coverage with an 'outperform' rating, and a target price of Rs 903, an upside potential of 28%.

• Strong order backlog of class 8 trucks in North America helping deliver better than expected CV exports.

• Nascent EV exposure, but efforts to build order book is positive.

• Strong cyclical recovery in both key domestic and exports businesses.

• Better chips supply and production growth ahead to help.

• Potential key beneficiary from the increased push for indigenisation of the Indian defence sector.

• Company plans to have equal contribution from commercial vehicles, passenger vehicles and industrials.

Sona BLW Precision

• Initiate coverage with 'neutral' rating and a target price of Rs 552, implied upside of 0.4%.

• Long experience in manufacturing high torque differential gears and assemblies puts it in a unique position to reap benefits from increasing shift towards EVs.

• New products like traction motors provide optionality of unlocking growth in the electrical division.

• Given large share of orders are for EVs, Sona is all set to see further increase in its revenues coming from battery electric vehicles.

• Margins could continue to remain at the bottom of historical range near term.

• Sona Comstar's margins, return on capital employed and free cash flow generation are among the best versus peers. This financial strength with low gearing provides fodder for growing inorganically through acquisitions if the right opportunity exists.