Auto rally doesn't downshift as Q3 outlook stays steady on firm demand

Strong order books keep automakers driving past slowdown fears

The Nifty Auto index touched record highs twice this week on expectations that demand has stayed strong after the festival season, helped by goods and services tax (GST) rate cuts, easing inflation, and the wedding cycle. This follows a strong second quarter (July–September/Q2), where most automakers reported double-digit volume growth across segments. 

The Nifty Auto index is the second-best performer among major sectoral indices over the past year, up 21 per cent. Three stocks drove much of the rise with gains above 45 per cent: Eicher Motors (46.5 per cent), TVS Motor Company (46.2 per cent), and Maruti Suzuki India (45.2 per cent). Ashok Leyland gained 36.6 per cent, and Hero MotoCorp rose 29.1 per cent. 

While the outlook remains encouraging, the rally has pushed valuations above five-year averages for most stocks, which may limit near-term upside. Among the larger names, only Mahindra & Mahindra (M&M) and Maruti Suzuki show more than 11 per cent potential upside based on Bloomberg consensus targets. 

Beyond domestic demand, brokerages expect additional growth from improving exports of two-wheelers (2Ws) and passenger vehicles (PVs). Commercial vehicle (CV) demand is seen benefiting from higher infrastructure spending, while tractors could ride on firmer rural sentiment. 

The key near-term trigger is November volume performance. Analysts at Anand Rathi, led by Mumuksh Mandlesha, expect the auto sector to deliver double-digit growth across categories, with demand holding steady after the festival period, driven by GST changes, wedding purchases, and low inventories.

 

They expect 2W sales to rise in the high teens year-on-year (Y-o-Y), supported by retail strength and rural consumption. CV wholesale volumes are expected to grow in the mid-teens on a favourable base and stronger freight demand, while PVs could close the month with mid-teens growth on the back of strong retail sales, lean inventory, and new launches.

 

The brokerage remains positive on the sector, citing GST reforms, the wedding season, rural demand, improved interest rates, and higher disposable income. Its preferred stocks among vehicle makers are Hero, Maruti Suzuki, and Ashok Leyland.

 

Nomura expects 2W volumes to rise 15 per cent and PVs to grow 21 per cent Y-o-Y in November. Analysts Kapil Singh and Siddhartha Bera highlighted the unexpected strength in CV demand, which could climb 20 per cent this month.

 

CV demand has strengthened since the GST cuts, as better operating economics and stable freight rates have kept demand intact, according to the brokerage.

 

After a solid Q2, brokerages expect the large auto companies to deliver another strong quarter in October–December (Q3). For Q3, Nirmal Bang expects volume growth across categories to be supported by the post-festival buying cycle, wedding demand, GST 2.0, softer inflation, and easier financing.

 

Analyst Yash Agrawal expects export recovery to aid both 2Ws and four-wheelers (4Ws), while higher infrastructure activity should lift CV volumes. Last-mile transport and e-commerce activity are also expected to lift small-CV sales, helped by GST 2.0. Tractor demand should hold up on the back of a healthy crop outlook and rural incomes.

 

Its top picks include M&M and Maruti Suzuki in 4Ws, Eicher and Hero in 2Ws, and Suprajit Engineering, ASK Automotive, and Ceat in the auto parts space.