According to a research report by Elara Capital, the auto ancillary sector's revenue expanded by 12.5% year-on-year in FY26, fueled by robust volume growth across multiple segments and an enhanced product mix. The report highlighted that absolute EBITDA grew by 13.3%, while the aggregate operating margin remained unchanged at 13.6%.
Segment Performance and Margin Trends
The analysis of 59 listed auto component manufacturers revealed that 25 firms experienced a contraction in their operating margins. Among segments, suspension braking and multiproduct categories led the revenue growth, posting increases of 16% and 15%, respectively. In terms of profitability, tyres, lighting, and suspension segments outperformed with a 17% rise in EBITDA, whereas forgings and batteries saw declines of 4% and 1%, respectively.
Demand Outlook for FY27
The report stated, "Demand outlook for FY27 is broadly constructive, led by healthy momentum across 2W, PV, CV, tractors and replacement markets in India." It added, "Expect EV-linked businesses, electronics/content-rich products and defence/aerospace to outgrow, while global/export demand to be mixed with Europe remaining weak and North America showing improving trends."
Input Cost Challenges
Operational challenges persist due to rising input costs. The report identified commodity inflation as a significant near-term headwind, with most component manufacturers facing margin pressure in Q1 FY27 from higher costs of copper, aluminum, steel, rubber, crude-linked inputs, freight, and energy. Although pass-through mechanisms are widely operational, recovery typically lags by one quarter to six months, maintaining near-term pressure on margins despite recent price hikes.
Capital Allocation and Free Cash Flow
Aggregate capex intensity stood at 5.9% of sales during FY26, while free cash flow generation remained stable at 4.7%. For FY27, the report expects passenger vehicle sales to grow by 7% and two-wheelers by 8%.
Key Drivers for Outperformance
The firm concluded that "there are four key reasons for any auto ancillary to outperform OEMs: product expansion, segment expansion, geographic expansion, inorganic expansion."
