Auto sector enters premium growth cycle, says MOFSL; Maruti, TVS top picks

While near-term uncertainties surrounding the monsoon, crude oil prices and geopolitical developments persist, auto sector's growth outlook is increasingly being driven by structural demand.

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  The Indian automobile sector is entering a more sustainable growth phase, supported by improving demand, premiumisation and a favourable cost environment. Following a period of supply-chain disruptions and uneven demand, industry fundamentals have strengthened, aided by easing commodity cost pressures, stable financing conditions and continued government-led infrastructure spending. 

 

While near-term uncertainties surrounding the monsoon, crude oil prices and geopolitical developments persist, the sector's growth outlook is increasingly being driven by structural demand rather than cyclical recovery.

 

Demand trends remain healthy across major vehicle segments, although growth continues to be differentiated. Passenger vehicles remain the key growth driver, led by sustained demand for utility vehicles, which now account for nearly 68 per cent of total passenger vehicle sales. In the two-wheeler segment, premium motorcycles and scooters continue to outperform entry-level commuter models, reflecting rising consumer preference for higher-value products and improving affordability following recent tax rationalisation. Commercial vehicle demand has also strengthened, supported by infrastructure execution, mining activity, e-commerce logistics and replacement demand, while tractor sales are expected to remain closely linked to the progress of the southwest monsoon and rural income trends.

 

 

The operating environment has become increasingly supportive from a margin perspective. Prices of key raw materials, including steel, aluminium, rubber and precious metals, have largely stabilised following an extended period of volatility, reducing input cost pressures across the industry. Although crude oil prices remain an important monitorable given their impact on logistics, raw materials and fuel costs, the overall cost environment is considerably more benign than in recent years. This is providing manufacturers with greater pricing flexibility, supporting operating margins and enabling continued investments in product development, technology and electrification. Higher capacity utilisation is also improving operating leverage across OEMs and component manufacturers.

 

The sector is simultaneously undergoing a structural transformation driven by premiumisation, electrification and increasing technology content. Consumer demand continues to shift towards feature-rich utility vehicles, premium motorcycles, connected mobility solutions and electric vehicles, encouraging manufacturers to expand product portfolios and invest in advanced manufacturing capabilities. Capacity additions across vehicle assembly, battery manufacturing and auto components are accelerating, supported by government initiatives promoting domestic manufacturing and localisation. Auto component manufacturers are also well positioned to benefit from higher localisation, growing export opportunities and increasing electronic and software content per vehicle.

 

Near-term risks remain centred on rainfall distribution, rural income trends, crude oil prices and geopolitical developments, which could influence commodity costs and consumer sentiment. Entry-level vehicle demand remains relatively sensitive to inflationary pressures, while intermittent supply disruptions in specific components could affect production schedules. However, improving inventory discipline, healthier dealer networks and a robust pipeline of new product launches are expected to mitigate these risks.

 

Overall, the Indian automobile sector is transitioning from a volume-led recovery to a more sustainable, value-driven growth cycle. Improving demand across key segments, healthy margin expansion, rising manufacturing investments and favourable premiumisation trends continue to reinforce the sector's long-term fundamentals. While macroeconomic risks warrant monitoring, sustained product innovation, favourable demographics and continued infrastructure development are expected to support durable growth and strengthen the sector's earnings outlook over the medium term.  CHECK Stock Market LIVE Updates 

Top auto stocks to buy: Recommendations by Motilal Oswal

 

Maruti Suzuki 

Target price: ₹17,059 

Maruti Suzuki is well positioned to regain market share, supported by ramp-up at its Kharkhoda and Gujarat plants, a healthy launch pipeline, revival in small-car demand, and lean dealer inventory. Over the medium term, plans to launch seven new SUVs by 2031 and expand exports to 750–800k units by FY31 strengthen its long-term growth outlook. 

 

Market share recovery gained momentum in 1QFY27 as capacity constraints eased, enabling the company to outperform the industry. Demand improved following the GST rate cut, while exports remained resilient despite geopolitical tensions, rising 28 per cent YoY in the quarter, reflecting the benefits of a well-diversified global presence.  

 

Margins are expected to normalize as raw material costs moderate and volume growth remains healthy. We expect Maruti Suzuki to deliver a 20 per cent earnings CAGR over FY26–28E, supported by sustained domestic outperformance, export growth, and operating leverage.

 

TVS Motor 

Target price: ₹4,470

 

TVS Motor is well positioned to sustain its outperformance, supported by consistent market share gains across domestic and export markets, a strong premium product pipeline, robust electric vehicle momentum, and ongoing capacity expansion. Continued investments in new products are expected to reinforce its long-term growth trajectory and premium valuation. 

 

TVS delivered a strong 1QFY27 performance with record sales of 1.63 million units. Revenue increased 37.8 per cent YoY, while EBITDA margin expanded to 12.8 per cent, exceeding estimates on the back of a richer product mix, favourable currency movements, and disciplined cost control despite commodity cost inflation. 

 

Management expects double-digit domestic industry growth, resilient export demand, and continued electric vehicle adoption, supported by capacity expansion and new launches. We estimate TVS to deliver revenue/EBITDA/PAT CAGR of 20 per cent/23 per cent/24 per cent over FY26–28E.