# Automobiles, auto components and tyres — sector playbook

Use this when: the company manufactures or sells vehicles or the parts that go into them — passenger vehicles, commercial vehicles, two- and three-wheelers, tractors and farm equipment, buses, EV pure-plays, Tier-1/Tier-2 auto components, tyres, batteries and auto electricals, and vehicle dealership groups.

This sector breaks the generic checklist harder than almost any other, for three compounding reasons. First, most large OEMs consolidate a captive lending business, so every leverage, coverage and cash-flow ratio computed on consolidated numbers is arithmetically valid and economically meaningless. Second, revenue is recognised on *dispatch to dealers*, not on retail sale, so several quarters of "growth" can be manufactured inside the distribution channel and are invisible in the financial statements. Third, this is a deep cyclical with 5–7 year product cycles and heavy operating leverage, which inverts P/E and turns free cash flow into a cycle amplifier rather than a quality signal. Work in units and per-unit currency, separate the industrial business from the finance arm, and normalise to mid-cycle before you value anything.

## Contents

- [Why the generic ratio set fails here](#why-the-generic-ratio-set-fails-here)
- [The metrics that actually matter](#the-metrics-that-actually-matter)
- [How to value companies in this sector](#how-to-value-companies-in-this-sector)
- [Peer set construction](#peer-set-construction)
- [Sector-specific red flags](#sector-specific-red-flags)
- [Cycle and structural context](#cycle-and-structural-context)
- [India vs global notes](#india-vs-global-notes)
- [Checklist](#checklist)

## Why the generic ratio set fails here

**D/E, net debt/EBITDA and interest coverage — meaningless on consolidated numbers, and mis-signed.** Most large OEMs run a captive financier (GM Financial, Ford Credit, VW Financial Services, Toyota Financial Services; in India Mahindra Finance, Tata Motors Finance, TVS Credit, Bajaj Auto Credit). A lender is *supposed* to be levered 6–10x. Consolidating it makes an OEM with net industrial cash look like a distressed balance sheet, and simultaneously hides where the real automotive leverage sits. Ford and GM have carried automotive net cash while showing $100bn+ of consolidated debt. The only meaningful figure is **automotive (industrial) net debt** with the finance arm deconsolidated or equity-accounted. Never quote consolidated gearing for an OEM without saying which it is.

**OPM / EBITDA margin — not comparable across sub-sectors, and not comparable across accounting regimes.** Structural margins differ by design: two-wheelers 12–18%, tractors 14–18%, PVs 8–12%, CVs 8–12%, tyres 12–16%, components 8–14%, EV pure-plays frequently negative. Worse, IFRS and Ind-AS permit capitalisation of product development cost while US GAAP forces immediate expensing of R&D. That single difference can swing reported EBITDA margin by 400–600 bps with zero economic difference — so comparing an Ind-AS filer's EBITDA margin to a US GAAP peer's without adjustment is an accounting artefact, not analysis. Percentage margin is also corrupted by commodity pass-through: falling steel prices cut revenue and *raise* OPM% with no value created.

**P/E — actively inverted.** At the cycle peak, earnings are maximal and trailing P/E is lowest; that is the danger point, not the bargain. At the trough, P/E is huge or negative and screens exclude the stock precisely when risk/reward is best. For CVs, tyres and global mass-market OEMs, low trailing P/E is a contrary indicator. Use it only after normalisation, and only where the business genuinely behaves like a consumer franchise.

**Free cash flow — a cycle amplifier, not a quality signal.** OEMs and many component makers run structurally *negative* working capital (dealers pay on or before dispatch; suppliers are paid on 45–90 day terms), so volume growth mechanically releases cash and volume decline consumes it, independent of profitability. On top of that, capex plus product development is lumpy across a 4–6 year platform cycle: heavy investment years show poor FCF from a healthy business, and harvest years show excellent FCF from a business quietly starving its model pipeline. One-year and even three-year FCF says almost nothing. Assess cumulative FCF across a full product cycle.

**Current ratio / quick ratio — inverted for OEMs.** A current ratio below 1.0 is normal for an OEM and is evidence of *channel strength* — a generic screen flags it as distress. Conversely, a component maker at 2.5x is usually carrying dead inventory or stretched OEM receivables. The sign of the signal flips depending on which side of the supply chain the company sits.

**ROCE and book value — distorted in both directions.** Serial impairments shrink the capital base and mechanically inflate subsequent ROCE, so a company that writes down enough plants and platforms can manufacture an apparent returns recovery. In the other direction, cash-rich Indian OEMs carry very large treasury books inside capital employed, depressing reported ROCE well below the true operating return. And non-operating income sits inside the numerator: regulatory credit sales (ZEV/CAFE), EU CO2 pooling receipts, PLI/FAME/export incentives, treasury income. Recompute ROCE on automotive capital employed, ex-cash, ex-credits, with accumulated impairments added back.

**Revenue itself — not what it appears to be.** Headline revenue is wholesale dispatches, not retail sales. Every ratio built on revenue can be inflated for two to three quarters by pushing stock into the dealer channel. Anchor to unit volumes and to independent retail data before trusting any revenue-derived number.

**Growth as an unqualified positive — needs qualification.** Volume growth bought with discounts, longer loan tenors from the captive financier, or channel stuffing is borrowed from future quarters. Decompose growth into retail demand, mix, price and channel fill before scoring it.

## The metrics that actually matter

Ranges are **indicative only**. They vary by market, sub-sector, cycle position and period, and any of them can be wrong for a specific company in a specific year. Comparison against a tight peer set and against the company's own full-cycle history overrides every absolute band below. Work in units and absolute per-unit currency wherever possible — percentages hide the sector's real economics.

| Metric | Definition / how to compute | Indicative healthy range | Why it matters |
|---|---|---|---|
| **Wholesale dispatches vs retail registrations; dealer channel inventory (days)** | Units billed to dealers (which become revenue) versus units actually registered to end customers, and the resulting stock in the channel. India: company/SIAM dispatches vs VAHAN registrations, with FADA's dealer inventory commentary. US: "days' supply" of new-vehicle inventory. | Retail growth ≥ wholesale growth over any trailing 12 months. India PV/2W channel inventory ~20–30 days (FADA flags >35–40). US days' supply ~45–60 normal, <35 tight, >80 stressed. | The single most important early-warning KPI in the sector, and it is invisible in the financial statements. Revenue is recognised on dispatch, so an OEM can report volume and margin growth for two to three quarters purely by stuffing the channel. The unwind is brutal — production cuts, discounting and negative operating leverage arrive together. A persistent wholesale-over-retail gap preceded almost every major auto earnings reset. |
| **EBITDA (or contribution) per vehicle, in absolute currency** | Operating profit per unit sold rather than as a % of revenue. Ideally split into contribution per unit (net realisation − variable cost) and fixed cost per unit. | Segment-specific: Indian mass 2W roughly ₹8,000–11,000/unit (premium marques ₹35,000–45,000); Indian PV roughly ₹45,000–90,000/unit; global mass-market OEM roughly $1,500–3,000/unit; premium European OEM €5,000–9,000/unit. Judge the trend and the gap to best-in-segment, not the level. | Percentage margin conflates price, mix and commodity pass-through. Per-unit profit strips that out and separates the two things that matter: pricing/mix power (contribution per unit) and scale absorption (fixed cost per unit). It is also the correct input into a mid-cycle valuation — mid-cycle volume × mid-cycle EBITDA/unit. |
| **Net realisation per vehicle and discount / incentive per unit** | ASP actually booked after dealer discounts, cash incentives, exchange bonuses, subvention paid to the finance arm and fleet rebates — against list price. Decompose ASP growth into price action vs mix (SUV / premium / higher-trim share). | India PV: normal discounts ₹20,000–60,000/unit; sustained discounts above roughly ₹1.0–1.5 lakh on volume models signal demand stress. US: incentives 3–6% of ATP normal, >8–10% indicates oversupply. | Discounting is the pressure valve of an oversupplied auto market and it moves before volumes do. Companies routinely route incentives through the captive financier as interest subvention or through dealer margin support, so headline ASP holds while true realisation erodes. Mix-led ASP growth is high quality and repeatable; price-led is neither. Read alongside channel inventory to know whether reported growth was bought. |
| **Automotive (industrial) net debt / net cash and automotive FCF, excluding the captive finance arm** | Balance sheet and cash flow of the manufacturing business only, financial services deconsolidated or equity-accounted. Automotive FCF = automotive operating cash flow − capex − capitalised product development. | Best-in-class: automotive net cash. Acceptable: automotive net debt/EBITDA <1.0x. Liquidity buffer covering at least one to two quarters of fixed costs plus scheduled maturities (large global OEMs typically target $20–30bn automotive liquidity). Assess FCF cumulatively across a full 4–6 year product cycle. | This is the correct solvency test, and it is exactly what a generic D/E ratio destroys. Autos are a high-fixed-cost, high-operating-leverage business where a 20% volume decline can turn EBITDA negative within two quarters; survival is determined by industrial net cash, not consolidated gearing. Multi-year OEM deleveraging stories, and the net-industrial-cash-despite-huge-consolidated-debt position of the US majors, are only visible on this basis. |
| **R&D + product development spend as % of revenue, and the capitalisation ratio** | Total engineering/product development outlay (expensed + capitalised) as a share of revenue; the share capitalised rather than expensed; and the gap between annual capitalisation and annual amortisation of development assets. | OEM 4–7% of revenue (EV-transition years 6–9%); components 2–5%; Indian 2W/PV historically 2–4%. Capitalisation ratio: US GAAP peers 0%; IFRS/Ind-AS peers commonly 50–80%. The ratio should not be rising, and cumulative capitalisation should broadly equal cumulative amortisation across a full cycle. | The number one comparability adjustment in global auto analysis and the number one soft-earnings lever. Every unit capitalised bypasses today's P&L and creates an amortisation drag later. A rising capitalisation ratio, a lengthening amortisation life, or capitalisation persistently exceeding amortisation means reported EBITDA and EPS are borrowed from future years. The opposite is equally dangerous: harvesting FCF by cutting product spend buys two good years and then a lost model cycle. |
| **Total investment intensity: (capex + capitalised development) as % of revenue, and vs D&A** | All growth and maintenance investment as a share of sales, benchmarked to D&A to see whether the asset base is being renewed, harvested or over-built. | OEM through-cycle 6–9% of revenue (platform/EV transition years 10–12%); components 5–8%. Investment/D&A around 1.0–1.3x in steady state; sustained <0.8x = under-investment; sustained >2.0x with flat volumes = over-building. | Autos are the archetypal capital-cycle industry: returns are made by companies that invest counter-cyclically and destroyed by those that commission greenfield capacity at the peak. Because product cycles run 5–7 years, single-year capex tells you nothing; the ratio to D&A and its timing against the volume cycle tell you almost everything about future ROIC. |
| **Capacity utilisation and breakeven volume (operating leverage)** | Units produced as a share of installed/rated capacity, plus the volume at which EBIT turns zero, derived from contribution per unit and the fixed cost base. | Healthy OEM utilisation 75–90%; below roughly 65% most OEMs are loss-making at EBIT. Breakeven typically 55–70% of installed capacity for a well-run OEM; breakeven above 80% is a fragile model. | Auto economics are dominated by fixed-cost absorption — a plant is roughly 25–35% fixed cost, so a 10% volume swing can move EBITDA margin 200–350 bps. Knowing breakeven volume lets you model the downside honestly instead of extrapolating peak margin. It also explains why utilisation, not price, drives the cycle, and why industry-wide capacity announcements are a bearish signal 2–3 years out. |
| **Through-cycle / mid-cycle ROIC on automotive capital employed** | NOPAT of the manufacturing business / automotive invested capital — excluding the finance arm, excluding surplus cash and treasury investments, adding back accumulated impairments. Computed as a full-cycle average, or on normalised mid-cycle volume and mid-cycle EBITDA per unit. | Global mass-market OEM cost of capital roughly 8–10%; most earn below it through the cycle. Strong: >15% pre-tax on automotive capital. Indian franchises are structurally better — leading 2W/PV/tractor names and top ancillaries run 15–30%+. Components: >18% ex-cash is the quality threshold. | Reported ROCE is doubly distorted — large treasury books depress it, serial write-downs flatter it by shrinking the denominator. The economic question is whether the company earns above its cost of capital across a full cycle. Most volume OEMs historically do not, which is precisely why they deserve low multiples, and why the rare exceptions can justify consumer-franchise multiples. |
| **Working capital cycle: inventory vs payable days, and off-balance-sheet supplier financing** | Inventory, receivable and payable days for the automotive business; the resulting (usually negative) net working capital; and any reverse factoring / supply chain finance / channel financing that shifts payables off the debt line. | OEM: inventory 18–30 days, receivables 10–20, payables 45–75, net working capital negative (roughly −5% to −15% of sales). Component makers are the mirror image: receivables 60–90 days from OEMs, positive working capital 15–25% of sales. Payable days rising 15–20+ days without a stated policy change warrants investigation. | Negative working capital is a genuine competitive strength — the dealer and supplier base funds the OEM — but it makes cash flow pro-cyclical and easy to manipulate. Stretching supplier terms or moving payables into a bank-intermediated reverse factoring programme flatters operating cash flow and understates true debt; it is a recurring cause of sudden supplier distress and restated leverage. For component makers, the same lens exposes OEM receivable stretch, the first symptom of an OEM in trouble. |
| **Warranty provision as % of sales; accrual vs claims paid; recall exposure** | The warranty accrual rate charged each period, cash actually paid on claims, the closing provision balance, and disclosed recall campaigns with per-vehicle cost. | OEM warranty and campaign accruals typically 1.5–3.5% of automotive revenue (premium and complex-powertrain at the higher end; simple 2W/tractor products well below 1.5%). Provision balance broadly stable relative to the warranted parc; accruals should approximate claims paid over time. | The most under-scrutinised earnings lever in autos. Trimming the accrual rate by 50 bps flows straight to EBIT and is nearly invisible; the bill arrives 18–36 months later as a "one-off" campaign charge. A falling accrual rate while the warranted parc, product complexity or new-model share is rising — or a provision balance draining while claims paid rise — signals borrowed earnings. Recall economics matter directly: a single campaign can erase a year of segment profit. |
| **Content per vehicle and booked business / order book (components)** | Revenue earned per vehicle produced by the customer base (kit value), plus the cumulative lifetime value of programmes awarded but not yet in production, and book-to-bill. | Booked lifetime business 2.5–4x current annual revenue for a healthy Tier-1; annual new business wins ≥1.2x revenue (book-to-bill >1). Content per vehicle should grow faster than industry volumes — that gap is the real organic growth. | A component maker's growth is a function of (a) how many vehicles its customers build and (b) how much of each vehicle it supplies. Content per vehicle isolates the second — the only part management controls and the only part that survives a volume downturn. The order book gives 3–5 years of forward visibility no financial ratio provides, and it is where the EV transition is won or lost: ICE-exposed content (exhaust, fuel systems, transmissions) can be structurally stranded while current revenue still looks fine. |
| **Customer, platform and geography concentration; aftermarket mix** | Revenue share from the top customer and top five, from the largest platform/model, and by end market — set against revenue from the higher-margin replacement/aftermarket and service channel. | Components: top customer <30–35%, top five <60–65%. Indian ancillaries frequently run 40–70% single-OEM dependence, which raises risk materially and justifies a lower multiple. Aftermarket 15–30% of revenue is a strong buffer, typically at 1.5–2.5x OEM-channel margins. OEMs: no single model >25–30% of profit is preferable. | An OEM programme loss, a customer's model failure, or one plant's re-sourcing decision can remove a fifth of revenue with almost no notice — and Tier-1s have little pricing power against a concentrated customer, where annual price-down clauses of 1–3% are a contractual norm. Aftermarket revenue is counter-cyclical, higher-margin and brand-driven; it changes the quality of the earnings stream, and is why tyre, battery, filter and lubricant companies deserve different multiples from pure OEM suppliers. |
| **Captive finance arm quality: penetration, NIM, credit cost, residual value exposure, leverage** | Share of vehicle sales financed in-house (penetration); the finance arm's NIM; gross/net credit cost and delinquency; equity/assets or D/E; and, in developed markets, lease portfolio size and the residual values assumed. | Penetration 30–55% typical. Retail auto loan net charge-offs roughly 0.5–2.0% of receivables through the cycle (subprime-heavy books far higher); Indian captive NBFC GNPA varies widely — rural/tractor and used-CV books run structurally higher. Finance-arm leverage 6–10x is normal for the entity but should be ring-fenced. Tenor extension beyond 60–72 months (India) or 72–84 months (US) is a demand-pull-forward signal. | The captive financier is simultaneously a demand subsidy, a profit centre and a hidden risk pool. It can manufacture volumes (looser credit, longer tenors, subvented rates funded by the auto arm), shift profit between segments via intersegment pricing, and warehouse residual value risk on leases whose assumptions management sets. In a downturn the auto business and the credit book deteriorate *simultaneously* — the correlation that makes this far more dangerous than a standalone lender's book. Analyse with banking metrics (P/B, ROA, credit cost) and value separately; see `references/sectors/nbfc.md`. |
| **Powertrain transition KPIs: EV/hybrid mix, EV contribution margin ex-credits, battery cost per kWh, compliance position** | Share of volumes and revenue from BEV / hybrid / CNG vs ICE; standalone gross or contribution margin on EVs stripped of regulatory credits and government incentives; battery pack cost per kWh and cell sourcing security; position against emissions and fuel-economy rules (EU CO2 and Euro 7, US CAFE/EPA and ZEV, India CAFE-III and the 2W EV regime). | EV gross margin trending toward parity with the ICE portfolio; pack cost falling toward and below roughly $100/kWh for leading chemistries. Compliance position should require no purchased credits. Dependence on FAME/PLI/state subsidies or credit sales for segment profitability should be quantified and ideally small. | The sector's largest capital-allocation question, and it appears in no standard ratio. Regulatory credit sales and subsidy income are pure-margin, non-operating and policy-dependent — they can vanish with a rule change or subsidy expiry, and India's repeated FAME revisions repriced the domestic EV two-wheeler industry within a single quarter. Simultaneously, ICE-heavy asset bases and ICE-specific content face impairment and stranding. Consolidated margin hides both the subsidy dependence and the cross-subsidy from a profitable ICE business funding a loss-making EV ramp. |
| **Market share, model age and launch cadence** | Segment-level share trend; weighted average age of the model portfolio; number of major launches and mid-cycle refreshes in the next 24–36 months; share of volumes from products launched in the last three years. | Product cycles run 5–7 years with a refresh at year 3–4. Weighted average portfolio age above roughly 5 years with a thin pipeline means share loss ahead. A healthy OEM generates 30–50% of volumes from products launched or refreshed in the last three years. Share should be defended without a rising discount per unit. | Auto profitability is a hit-driven, product-cycle business, and share is won or lost on launches, not on cost programmes. Share held while discounts rise is share bought, not earned. Conversely, weak margins during a heavy launch-investment phase are frequently the best entry point. Model age also predicts the timing of the capitalised-development amortisation charge and the next capex wave, tying an operational KPI directly to future reported earnings. |
| **Raw material basket and gross profit per unit (components and tyres)** | Movement in the specific input basket — steel, aluminium, copper, natural and synthetic rubber, carbon black, crude derivatives, lead, palladium/platinum/rhodium — against realisation, with the contractual indexation/pass-through lag stated. Judge on gross profit per unit, not gross margin %. | Pass-through lag typically one to two quarters. Gross profit per unit should be flat-to-rising through an input cycle; if it only rises when inputs fall, there is no pricing power. Tyres: replacement-mix share is the main margin determinant. | Where inputs are contractually indexed, OPM% moves mechanically with commodity prices and carries no information — falling inputs raise margin with no value created, rising inputs do the reverse, and the market mistakes both for operating performance. Gross profit per unit is the pass-through-neutral measure of whether the company is actually capturing value. Also net off the annual 1–3% OEM price-down that must be recovered through productivity. |
| **Exports, currency and demand-driver mix** | Share of revenue by end market and currency, natural hedge (imported content vs export revenue), hedging policy and open position; and, for India, the specific demand drivers per sub-sector. | No hard band — the requirement is that you can name the driver. India: monsoon and rural wages for tractors and mass 2W; freight rates, e-way bill volumes and infrastructure spend for CVs; financing availability and interest rates for PVs and CVs; replacement demand and parc age for tyres and aftermarket. | Auto sub-sectors do not share a cycle. Tractors can be at a peak while CVs are at a trough. Forecasting volumes without identifying the actual demand driver produces a GDP-linked guess. Currency matters twice over for exporters — translation on revenue and transaction on imported content — and hedge gains/losses often sit in other income, flattering or depressing "operating" performance. |

## How to value companies in this sector

The default framework is **sum-of-the-parts built on EV/EBITDA with mid-cycle normalisation**, with P/E reserved for businesses that genuinely behave like consumer franchises.

**1. SOTP is the default for any OEM with a captive finance arm or listed subsidiaries — which is nearly all of them.** You cannot value an industrial business and a lender with one multiple. Standard build: (a) the automotive/industrial business on EV/EBITDA or EV/EBIT; (b) the captive finance arm on price-to-book against its own ROE using NBFC/bank methodology — typically 0.8–1.5x book, below a standalone NBFC because the credit and volume risks are correlated; (c) listed subsidiary and associate stakes at market value with a 20–40% holding-company discount; (d) then deduct **only automotive** net debt. This is how the large Indian auto holdcos (an OEM plus a farm-equipment arm plus a listed finance arm plus listed non-auto subsidiaries) and the US majors are actually valued on the street.

**2. EV/EBITDA is the workhorse for the manufacturing business** because it is neutral to capital structure — essential given the finance arm — and to the very different depreciation policies across the sector. Indicative conventions: global mass-market OEM industrial business 2–5x; Indian PV/CV 8–14x; Indian premium 2W and tractor franchises 15–25x; auto components 10–18x in India and 5–9x in developed markets; tyres 7–11x. **Critical adjustment:** because IFRS/Ind-AS filers capitalise development spend, always cross-check with EV/EBIT (which captures the amortisation) or with an "EBITDA after capitalised product development" figure. Skip this and you will systematically over-value the capitalisers against US GAAP peers.

**3. Mid-cycle normalisation, not spot earnings.** The defensible approach for a cyclical is mid-cycle volume × mid-cycle EBITDA per vehicle × a through-cycle target multiple, or price-to-normalised-EPS. Spot P/E on peak earnings is the classic trap: low trailing P/E at the top of the cycle is a sell signal, and high or negative P/E at the trough is often the entry point. This is the single most important valuation discipline in the sector — state the mid-cycle volume and per-unit assumption explicitly so it can be challenged.

**4. P/B and replacement-cost anchors at the trough.** When earnings go negative, P/B becomes the operative floor metric. Global mass-market OEMs commonly trade at 0.3–0.9x book — a structural discount reflecting sub-cost-of-capital returns, not a bargain. Indian OEMs trade at 3–8x book because they genuinely earn 15–30% ROCE. Asset-based cross-checks: EV per unit of installed annual capacity, and replacement cost of the plant and platform base, useful for distressed or takeout scenarios.

**5. EV/Sales for loss-making or pre-scale players** (EV pure-plays, new entrants), since EBITDA is negative and meaningless. Only defensible when paired with a credible, quantified path to a target contribution margin and a stated breakeven volume; otherwise it is a narrative multiple with a decimal point.

**6. DCF is more useful for components than for OEMs.** Tier-1s have a contractually booked order book giving 3–5 years of visible revenue, which anchors the explicit forecast period. For OEMs, DCF is fragile — terminal value dominates, and terminal margin assumptions in a cyclical, technology-disrupted industry are close to guesswork. Where a DCF is run for an OEM, use normalised mid-cycle margins and set capex equal to a full-cycle average *including* capitalised development.

**7. Sub-sector specifics.** Dealership groups are valued on EV/EBITDA and on parts-and-service gross profit, because new-vehicle gross is a thin, cyclical spread and the service annuity carries the value. Tyre and battery makers are valued on EV/EBITDA with heavy weight on replacement-market mix and raw-material spreads. Fleet, leasing and rental operations are valued on book value and residual assumptions, closer to a financial than an industrial.

**Do not use:** trailing P/E on peak-cycle earnings as a value signal; consolidated EV or net debt for any OEM with a captive financier; EV/EBITDA compared across IFRS and US GAAP filers without a development-capitalisation adjustment; single-year FCF yield; or a DCF terminal value for an OEM built off current-year margins.

## Peer set construction

A valid comparable shares **sub-sector, end market, position in the value chain and accounting regime**. "Auto" is not a peer set.

**Splits that must not be mixed:**

- **Two-wheelers vs passenger vehicles vs commercial vehicles vs tractors.** Different demand drivers (rural income and monsoon vs urban financing vs freight and infrastructure), different cycle timing, different structural margins (2W 12–18% vs PV/CV 8–12%), different capital intensity. These sub-sectors routinely peak and trough in different years.
- **OEMs vs component makers vs tyres vs dealers.** OEMs have negative working capital and pricing power over dealers; Tier-1s have positive working capital, customer concentration and contractual annual price-downs; tyre and battery makers are commodity-spread plus replacement-brand businesses; dealers are thin-spread retailers whose profit sits in parts, service and finance commission.
- **Tier-1 vs Tier-2/Tier-3 suppliers.** Tier-1s sell systems and hold the design IP and the customer relationship; Tier-2s sell parts into a Tier-1 and are price-takers twice over. Different margins, different multiples, different survival odds in a downturn.
- **OEM-channel vs aftermarket-weighted suppliers.** An ancillary with 30% aftermarket revenue has a fundamentally different earnings stream — counter-cyclical, brand-driven, 1.5–2.5x the margin — from a pure OEM supplier. Do not average their multiples.
- **ICE-exposed vs powertrain-agnostic vs EV-levered content.** An exhaust or fuel-system supplier and a braking, suspension or interiors supplier face opposite structural futures on identical current financials.
- **EV pure-plays vs incumbent OEMs.** Different capital structures, no legacy footprint, negative EBITDA, and a valuation basis (EV/Sales on a growth narrative) that cannot be reconciled with an incumbent's EV/EBITDA.
- **Domestic-focused vs export-led.** Currency exposure, customer mix and cycle exposure differ entirely; an Indian ancillary with 60% Europe exposure is trading the European build rate, not the Indian one.
- **Mass-market vs premium/luxury OEMs.** Premium carries structurally higher per-unit profit, lower volume beta, different brand economics and different multiples.
- **Consolidated vs automotive-only basis.** Comparing one OEM's consolidated leverage or FCF against another's automotive-only figure is a material and common error. Fix the basis first, state it, and apply it to every peer.
- **IFRS/Ind-AS capitalisers vs US GAAP expensers.** Adjust for development capitalisation before any margin or EV/EBITDA comparison, or state that the comparison is not valid.

**Also align:** fiscal year end (Indian companies April–March, most global peers calendar); scale band (a niche ancillary and a global Tier-1 face different customer power); and cycle position of the *end market*, not the listing country.

Aim for 5–8 peers, state the basis explicitly, and benchmark every metric twice — against peers and against the company's own full-cycle history.

## Sector-specific red flags

- **Wholesale dispatches persistently outrunning retail registrations.** India: compare company/SIAM dispatches against VAHAN registrations and FADA dealer inventory commentary. US: watch days' supply. A two- to three-quarter gap means revenue and margin have been borrowed from future quarters and a production cut is coming.
- **Rising discounts, exchange bonuses, dealer margin support and interest subvention while headline ASP is described as stable.** Check discount per unit, and check whether incentives have been routed through the captive finance arm, where they appear as finance-segment cost rather than a reduction in automotive revenue.
- **A rising share of product development being capitalised, a lengthening amortisation life, or capitalisation persistently exceeding amortisation.** The sector's largest soft-earnings lever, and it guarantees a future EPS drag. The mirror image is equally bad: a sudden fall in R&D-to-sales that boosts FCF is harvesting the product pipeline, not efficiency.
- **Warranty accrual rate falling as a % of sales while the warranted parc, product complexity or new-model share rises**; or claims paid running materially above the accrual and draining the provision balance. Recurring "exceptional" recall and campaign charges alongside a low ongoing accrual rate is the same story told after the fact.
- **Consolidated leverage discussed without segregating the captive finance arm — in either direction.** Management highlighting consolidated "deleveraging" driven by the finance book, and a screen rejecting a net-cash industrial business because of consolidated NBFC debt, are both errors. Insist on automotive-only net debt and automotive-only FCF.
- **The captive financier being used to manufacture demand.** Loan tenors extending (past roughly 60–72 months in India, 84 months in the US), LTVs creeping up, penetration jumping without a rate explanation, provisioning falling while the book grows, or aggressive residual value assumptions on leases. Auto credit losses and auto volumes deteriorate together, so this risk is not diversified away.
- **Profit dependent on regulatory credits, subsidies or incentives** — ZEV/CAFE credit sales, EU CO2 pooling payments, PLI, FAME and state EV subsidies, RoDTEP and other export incentives. Recompute segment margin excluding all of it. Policy income is high-margin, non-operating and can be legislated away in a single budget.
- **Working capital flattery.** Payable days extending sharply, or undisclosed reverse factoring / supply chain finance / channel financing that moves payables off the reported debt line. This inflates operating cash flow, understates leverage and often precedes distress at the supplier base. India: also watch OEM-arranged channel financing that shifts inventory risk to dealers and their banks while the dispatch is still booked as a sale.
- **Capacity expansion or a greenfield announcement following three consecutive strong years — especially when peers announce simultaneously.** Industry-wide capacity additions at the cycle peak are the most reliable predictor of the next margin collapse. In this sector the capital cycle, not the demand cycle, is what destroys returns.
- **Serial "exceptional" or "one-off" items** — restructuring, impairment, redundancy, platform write-offs — appearing every year. Beyond obscuring true earnings, impairments shrink the capital base and mechanically inflate subsequent ROCE, so enough write-downs can manufacture an apparent returns recovery.
- **India — royalty and technical fee creep at MNC subsidiaries and JV-linked OEMs.** Royalty rising as a % of sales, or new-model royalties negotiated upward. This is a pre-tax charge that transfers value from minority shareholders to the foreign parent and is captured by no standard ratio. Scrutinise related-party purchases from promoter-owned component suppliers, which is common in Indian auto groups.
- **Component makers judged on margin percentage where the input is contractually indexed.** Falling input prices mechanically raise OPM% with no value created. Judge on gross profit per unit and content per vehicle. Also net off the 1–3% annual OEM price-down that is only recoverable through productivity.
- **Regulatory pre-buy presented as demand.** Emission deadlines pull sales forward and leave an air pocket immediately after — India's BS6 transition, each CAFE tightening, Euro 6/7 in Europe, EPA phases in the US. A record year immediately before a norm change should be normalised away, not extrapolated.
- **Under-disclosed concentration.** A single model, platform or OEM customer driving a disproportionate share of profit; or an order book heavily weighted to ICE-specific content facing structural stranding. At EV makers, check whether "record bookings" are refundable low-deposit reservations rather than firm orders.
- **India — balance-sheet and governance items specific to auto groups.** High promoter share pledging; complex holdco and cross-holding structures used to move cash between listed and unlisted entities; large inter-corporate deposits or loans to group companies; and treasury/other income presented inside "operating" performance for a manufacturing business.
- **FCF celebrated in a year where capex plus product development fell well below D&A.** In a business with 5–7 year product cycles, that is not cash generation — it is a deferred obligation, and the volume and share consequences show up two to three years later.

## Cycle and structural context

**Know where you are, because the cycle decides which metric lies to you.** Near the peak: utilisation is high, discounts are low, per-unit EBITDA is at a record, trailing P/E is optically low, and capacity announcements are multiplying. That combination is a sell configuration, not a value one. Near the trough: utilisation is below breakeven, EPS is negative or negligible, P/E is meaningless, P/B is at a multi-year low, and product spend is being cut across the industry — historically the best risk/reward, and the point at which screens exclude the stock. Because sub-sectors do not share a cycle, locate each one separately: tractors on the monsoon and rural income cycle; CVs on freight rates, fleet utilisation and infrastructure spend; PVs on financing cost and household income; 2W on rural wages and entry-level affordability; tyres and aftermarket on parc age and replacement demand, which is far less cyclical than OE fitment.

**The capital cycle dominates the demand cycle.** Returns in autos are destroyed by capacity commissioned at the peak and made by capacity added at the trough. Track industry-wide announced capacity, not just the company's. A supply response takes 2–3 years to arrive, which is exactly long enough for it to land in the following downturn.

**Operating leverage sets the shape of the downside.** With roughly 25–35% fixed cost at plant level plus a fixed engineering and platform cost base, a 10% volume decline can compress EBITDA margin 200–350 bps and a 20% decline can take EBITDA negative within two quarters. Always model the downside from breakeven volume upward rather than by haircutting peak margin.

**Structural threats to score explicitly.** The powertrain transition strands ICE-specific content (exhaust, fuel systems, multi-speed transmissions, ICE castings and some machining) while EVs have far fewer moving parts, which reduces content opportunity for some suppliers and increases it for others (thermal management, power electronics, electronics content, lightweighting). Battery cell sourcing and chemistry choices are now a first-order competitive variable. Chinese OEM export expansion is compressing prices in emerging markets and Europe. Software-defined vehicles shift value toward electronics and software and away from mechanical content. Shared mobility, ride-hailing fleet purchasing and, further out, autonomy change ownership patterns and the aftermarket. Semiconductor and rare-earth/magnet supply chains have repeatedly proved capable of capping production irrespective of demand.

**Regulation is a direct earnings and multiple driver.** Emissions and fuel-economy regimes (EU CO2 targets and Euro 7, US CAFE/EPA and ZEV mandates, India's BS norms and CAFE-III), safety mandates (which add content and cost), scrappage policies (which create replacement demand), import tariffs and localisation requirements, and in India GST rate changes on vehicles, PLI schemes and FAME/state EV subsidies. Each of these can move a sub-sector's volumes and multiple within a quarter. Always check what regulatory change is in flight before extrapolating current volumes or margins — and separately, whether last year's volumes were inflated by a pre-buy ahead of one.

## India vs global notes

| Dimension | India | US / global |
|---|---|---|
| Volume data | Monthly company dispatch releases and SIAM data (wholesale); VAHAN portal for retail registrations; FADA for dealer retail and channel inventory commentary. The dispatch/registration gap is publicly computable every month — use it. | Monthly/quarterly OEM sales releases; days' supply and average transaction price / incentive data from industry trackers; EU registrations via ACEA; China via CAAM. Retail vs wholesale is less separable in some markets — use inventory days instead. |
| Accounting | Ind-AS. Product development capitalisation is permitted and widely used — check the intangibles-under-development note and the amortisation policy. | IFRS peers capitalise similarly; **US GAAP requires R&D to be expensed**, so US OEMs and suppliers show structurally lower reported EBITDA margin for identical economics. This is the mandatory adjustment before any cross-border comparison. |
| Filings and disclosure | Annual report with Schedule III financials, MD&A, related-party note and segment reporting; quarterly results with an investor presentation and analyst concall (treat concall Q&A on discounts, channel inventory, capacity and launches as a primary source); CARO 2020 auditor reporting on related-party loans, inventory verification, defaults and undisclosed income. | 10-K / 10-Q / 20-F on EDGAR, with automotive-vs-financial-services segment reporting already separated for the US majors; supplemental financial packages with regional EBIT, incentive and lease residual detail; European annual reports with industrial vs financial services split. |
| Captive finance | Usually a separately listed or clearly identifiable NBFC subsidiary, RBI-regulated — often easier to carve out and value on P/B than in some global structures. | Segment reporting already splits automotive and financial services for US majors; European OEMs report an "industrial" vs "financial services" split. Use the company's own automotive net liquidity disclosure. |
| Units and conventions | ₹ crore and lakh; fiscal year April–March; volumes usually in units per month; promoter holding and pledge data disclosed quarterly (BSE/NSE); ASP and discount often discussed in ₹ per unit on the concall. | $ / € millions; calendar fiscal year for most; volumes in thousands of units or annualised SAAR (US); ATP and incentive per unit in dollars. |
| Ownership and governance | Promoter groups (family or MNC parent) dominate. Watch royalty/technical fee to the foreign parent, related-party purchases from promoter-owned suppliers, promoter pledging, and inter-corporate deposits within the group. | Widely held; the governance questions are executive compensation, capital return policy and activist pressure rather than related-party value transfer. Union contracts (UAW in the US, works councils in Germany) are a first-order cost and restructuring constraint largely absent in India. |
| Legacy liabilities | Gratuity and limited defined-benefit obligations; generally small. | Pension and OPEB obligations can be very large at legacy US and European OEMs and materially change enterprise value; check the funded status, not just the P&L charge. |
| Valuation convention | Consumer-franchise P/E multiples (20–40x) applied to net-cash, high-ROCE 2W/PV/tractor franchises in a low-penetration growth market; EV/EBITDA for CVs and components; P/B during CV downturns; SOTP for holdco structures. Direct valuation inputs include monsoon forecasts, rural sentiment, freight rates, infrastructure spend, and GST/PLI/FAME changes. | EV/EBITDA and P/B dominate; single-digit P/E on mass-market OEMs is structural, reflecting sub-cost-of-capital returns, legacy liabilities and cyclicality. Analysts focus on automotive FCF, industrial liquidity, incentive spend, days' supply and lease residual risk. Dividend and buyback capacity is assessed against automotive FCF only. |
| Convention traps | Do not import "low P/E means cheap" from developed markets into India, and do not export India's high-ROCE persistence assumption — Indian ancillaries with 40–70% single-OEM dependence do not deserve franchise multiples. | Do not apply Indian growth-market multiples to a replacement market, and do not treat a 0.4x P/B mass-market OEM as a bargain without a returns-above-cost-of-capital argument. |

## Checklist

- [ ] Identify the sub-sector precisely (2W / PV / CV / tractor / Tier-1 / Tier-2 / tyre / battery / EV pure-play / dealer) and route the peer set accordingly.
- [ ] Carve out the captive finance arm; restate net debt, FCF and leverage on an **automotive-only** basis and say so in the report.
- [ ] Compare wholesale dispatches against retail registrations (India: SIAM vs VAHAN, plus FADA channel inventory; US: days' supply) for the last 8 quarters.
- [ ] Compute EBITDA per vehicle and contribution per vehicle in absolute currency; track the trend and the gap to best-in-segment.
- [ ] Compute net realisation and discount/incentive per unit; decompose ASP growth into price vs mix; check whether incentives are routed through the financier.
- [ ] Pull R&D + product development as % of sales, the capitalisation ratio, the amortisation life, and capitalisation vs amortisation — adjust before any cross-regime margin comparison.
- [ ] Compute (capex + capitalised development) / revenue and / D&A; judge across a full 4–6 year product cycle, never one year.
- [ ] Estimate capacity utilisation and breakeven volume; model the downside from breakeven, not from a haircut to peak margin.
- [ ] Compute mid-cycle ROIC on automotive capital employed — ex finance arm, ex surplus cash, with impairments added back — and compare to cost of capital.
- [ ] Check working capital: inventory/receivable/payable days, direction of payable days, and any reverse factoring or channel financing disclosure.
- [ ] Check warranty accrual rate vs claims paid vs provision balance, and list recall campaigns and their per-vehicle cost.
- [ ] Components: get content per vehicle, booked lifetime business, book-to-bill, and the ICE vs powertrain-agnostic vs EV split of the order book.
- [ ] Map customer, platform and geography concentration, and the aftermarket revenue share.
- [ ] If there is a captive financier: penetration, NIM, credit cost, delinquency, tenor, LTV, leverage, lease residual assumptions — value it separately on P/B.
- [ ] Strip regulatory credits, PLI/FAME/export incentives and treasury income out of segment profit and recompute margin and ROCE.
- [ ] Assess model age, launch cadence and share of volumes from products under three years old; check whether share is being bought with discounts.
- [ ] For components/tyres: judge on gross profit per unit against the input basket, not on OPM%; net off contractual annual price-downs.
- [ ] State the demand driver explicitly (monsoon / freight / financing cost / parc age / export build rate) and where that specific cycle stands.
- [ ] Value via SOTP: automotive on EV/EBITDA cross-checked with EV/EBIT, finance arm on P/B, listed stakes at market less a 20–40% holdco discount, less automotive net debt.
- [ ] Normalise to mid-cycle volume × mid-cycle EBITDA per unit before applying any multiple; never anchor to trailing P/E on peak earnings.
- [ ] Check for peak-cycle capacity announcements — company and industry-wide — and for serial "exceptional" items inflating subsequent ROCE.
- [ ] India: read the related-party note, royalty/technical fee trend, promoter pledge, inter-corporate deposits and CARO observations.
- [ ] State the regulatory changes in flight (emissions, GST, subsidies, tariffs) and whether the last year's volumes were inflated by a pre-buy.
