Auto Ancillary: The New Defence Sector Powering India’s Self-Reliance Drive?

The Indian automobile industry has seen remarkable growth in recent years, bolstered by factors such as improving economic conditions, rising personal incomes, increased availability of semiconductor chips, and a reduction in input costs. Similar to the defence sector, Auto ancillaries has seen substantial growth due to strategic government initiatives and increasing self-reliance, the auto component industry is poised for significant expansion. Both sectors benefit from favourable government policies, increasing domestic capabilities, and a focus on reducing dependency on imports.

These elements have collectively contributed to a significant increase in overall industry volume. The auto component sector, in particular, is poised for substantial long-term growth opportunities, with India emerging as a key beneficiary of global Original Equipment Manufacturers (OEMs) adopting supply chain de-risking strategies.

Growth and Opportunities in the Auto Component Industry

The domestic auto component industry stands to benefit immensely from the ongoing global supply chain disruptions and the strategic diversification efforts of global OEMs over the past three to four years. The industry’s prospects are further strengthened by the increasing demand for premiumisation and the shift towards electric vehicles (EVs). Additionally, supportive government policies, notably the ‘Make in India’ initiative, have created a conducive environment for domestic manufacturing.

Make in India: A Catalyst for Manufacturing Growth

Launched in September 2014, the ‘Make in India’ initiative aims to boost manufacturing and encourage foreign direct investment (FDI) in various sectors, including automobile and auto components. The initiative’s objective was to increase the share of manufacturing in GDP to 25% by 2020. Despite falling short of this target, additional policies and extended deadlines have been introduced to continue fostering investment and innovation. Measures such as the National Infrastructure Pipeline (NIP), reduced corporate tax rates, and the opening of sectors like defence manufacturing and railways to FDI have been pivotal in making India an attractive manufacturing hub.

Production Linked Incentive (PLI) schemes boosting industrial investments

The PLI scheme aims to make Indian manufacturing globally competitive by removing sectoral obstacles, creating economies of scale, and ensuring efficiency. It seeks to develop a comprehensive component ecosystem in India and integrate the country into the global supply chain, reducing dependency on imports, particularly from China. Implemented from Fiscal 2022 to 2029, the scheme is expected to spur economic growth and generate employment opportunities, especially in labour-intensive sectors.

India’s Role as an Automotive Hub

India’s emergence as a significant automotive hub for global OEMs underscores the nation’s pivotal role in the global automotive landscape. The domestic auto component industry is projected to invest between USD 6.5 billion and USD 7 billion over the next five years, doubling the investment from the previous five years. This investment is driven by the robust trends of global quality at low costs and improving research and development (R&D) capabilities.

Stock Performance in the Auto Ancillary Sector

Several auto ancillary stocks have shown impressive growth in quarterly sales and profit, reflecting the sector’s positive outlook. Here are the top 15 stocks to watch

Outlook for Auto Ancillary Sector

the outlook for the auto ancillary sector is positive given momentum in the sector , driven by higher content per vehicle due to premiumisation and more comprehensive solution offerings, remains robust. The continued shift towards EVs and increasing orders for higher-value EV components will further bolster growth for auto ancillaries in the medium term.

India’s auto ancillary sector is well-positioned to capitalize on the country’s economic growth and the government’s push for self-sufficiency. The sector’s projected growth trajectory and strategic alignment with national goals suggest it has the potential to emulate the growth story of the defence sector in recent years.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.