Up to 18% surge in 1 month: Is GST-led rally in auto stocks near its end?

Auto stocks in India have surged 7-18 per cent on GST reforms. Analysts, however, warn of near-term correction amid . Long-term outlook bullish for PV, 2W, and CV segments.

A plethora of tailwinds for the automobile sector, including a cut in goods and services tax (GST) rates, is keeping analysts bullish on auto stocks from a long-term perspective, even as they see the rally running its course in the near-term.

 

Auto stocks, they pointed out, have rallied 7-18 per cent since Prime Minister Narendra Modi announced that the government would roll out “Next-Gen” GST reforms before Diwali 2025, stretching valuations into slightly uncomfortable zones.

 

"Indian auto stocks have outperformed the benchmark Nifty50 meaningfully since August 15 in anticipation of acceleration in demand due to the GST reduction. Current valuations, even after our EPS (earnings per share) estimate increases, are punchy and higher than long-term average," said HSBC analysts, who expect the scrips to remain range-bound in the near-term. 

 

Auto stocks' rally to apply brakes?

 

The Nifty Auto index has outperformed the benchmarks and other sectoral indices over the past six months (till September 15).

 

The index, ACE Equity data shows, has zoomed 30.2 per cent on the National Stock Exchange (NSE) during the period, led by a steep uptick in shares of TVS Motor Company (54.5 per cent), Hero MotoCorp (49.85 per cent), Ashok Leyland (36.24 per cent), Eicher Motors (35.60 per cent), and M&M (33.54 per cent). By comparison, the Nifty index was up 11.93 per cent.

 

A large part of this rally came on expectations that a cut in GST rates could trigger a "cyclical demand revival" in the auto sector, which contributes 16 per cent to the GST collections, and 49 per cent to manufacturing gross domestic product (GDP). 

 

A sensitivity analysis of sales volume trend and excise duty reduction shows that domestic passenger vehicle (PV) volumes grow at a compound annual growth rate (CAGR) of over 20 per cent for a two-year period in three out of four times while the two-wheeler volume CAGR lags by a few percentage points.

 

"Considering the macroeconomic favourable events like income tax rate cut, interest rate reduction in 2025-26 (FY26), and the expected pay commission benefit in FY27, we increase FY26 PV sales volume by 275 basis points (bps) to 8.4 per cent and by 670 bps for FY27F to 16.7 per cent," a report by InCred Equities said.

 

The brokerage expects volume growth recovery to be led by cars and two-wheelers in the festive season, followed by commercial vehicles (CVs) in the second half of the current financial year (H2FY26).

 

Channel checks with dealers, too, suggest that customer activity on the ground has increased, with inquiries rising meaningfully across two-wheeler and PV showrooms. Many dealers have also flagged strong footfalls.

 

"Our base case remains that while entry segment cars and hatchbacks will see a demand boost in the near term, the long-term trend of consumer preference shifting away from hatchbacks and entry segment cars to compact sports utility vehicles (SUVs) is likely to continue after that. Mix improvement for original equipment manufacturers (OEMs) will lead to higher operating leverage, lower discounts, and margin expansion (potentially 100-150 bps)," Nomura said.

 

That said, while predicting similar positives over the next two-three years, Kotak Institutional Equities said that two-wheelers in India may be required to be equipped with anti-lock braking systems (ABS) from next calendar year (CY26), which could affect 84 per cent of the domestic two-wheeler market and lead to a ₹3,000-5,000 price increase.

 

"If ABS gets implemented, net price reduction would be in the range of 2-3 per cent. The implementation of these norms will have a negative impact on the entry-level segment – a factor not adequately priced in," it said.

 

Further, China's policy stance on exports of rare earth magnets and US President Donald Trump’s tariff tactics remain key macro-monitorables, analysts added.

 

Investment strategy

 

Kotak Institutional Equities maintained its “Sell” ratings on Hero MotoCorp, Bajaj Auto, and Eicher Motors, despite the volume/earnings upgrades, due to concerns related to the loss of market share for Hero MotoCorp and Bajaj Auto, and expensive valuations for Eicher Motors.

 

Choice Institutional Equities, too, downgraded Eicher Motors, Hero MotoCorp, and Maruti Suzuki to “Reduce”, but maintained “Buy” on M&M, and Ashok Leyland.

 

InCred, however, upgraded M&M and Escorts Kubota to “Add”, and Tata Motors to “Hold”.

 

HSBC maintained “Buy” on Maruti Suzuki and Hyundai on long-term export potential, and “Hold” on Bajaj Auto due to its persistent lower growth compared to peers.