Motilal Oswal's sector of the week: Auto; check top bet and target price

Lean inventory levels at the end of calendar year 2025 indicate better demand-supply alignment and set the stage for continuous momentum into the coming quarters, according to Motilal Oswal

The domestic automobile sector is witnessing a healthy and broad-based recovery, with demand remaining resilient even beyond the traditionally strong festive period. Aggregate industry volumes grew 17 per cent year-on-year in the third quarter, supported by uniform traction across two-wheelers, passenger vehicles, commercial vehicles, and tractors. Notably, retail momentum sustained through November and December, 2025, underscoring improving underlying demand rather than a one-off festive boost. Lean inventory levels at the end of the calendar year 2025 further indicate better demand-supply alignment and set the stage for continued momentum into the coming quarter.

 

This volume recovery is translating into robust financial performance. Original equipment manufacturers (OEMs) are expected to post revenue growth of around 24 per cent Y–o–Y in the third quarter, supported by operating leverage and moderation in discounts, particularly in passenger vehicles. While certain input costs such as precious metals have risen sequentially, these pressures are largely offset by softer steel prices and scale benefits. As a result, sector-wide operating margins are expected to remain stable to marginally higher, with no major players facing meaningful year-on-year margin erosion. Earnings growth is projected to be strong, with Earnings before interest, tax, depreciation, and amortisation (EBITDA) and profit after tax rising at a similar pace of about 27 per cent.

 

 

The positive spillover is also visible in the auto ancillary segment. Strong  original equipment manufacturing (OEM) production has driven revenue growth of roughly 14 per cent for component suppliers, while earnings are expected to grow faster due to operating leverage and, in some cases, favorable input cost trends. Tyre manufacturers, in particular, are benefiting from relatively benign raw material costs, supporting margin expansion. That said, performance within ancillaries remains selective, with a few players facing margin pressure due to adverse cost or mix dynamics.

 

From a structural standpoint, the demand recovery appears more durable this cycle. Entry-level vehicles across two-wheelers and passenger vehicles are seeing a meaningful pickup, aided by improved affordability and rationalized taxation. With wholesales and retails both tracking well and channel inventories under control, the sector is better positioned to sustain growth without resorting to aggressive discounting.

 

Looking ahead, the medium-term outlook for the auto sector remains constructive. Sustained volume growth, improving operating efficiencies, and stable cost structures provide a strong foundation for earnings expansion. While earnings upgrades so far have been moderate, reflecting prudence, the overall trajectory points to healthy growth across most segments. The sector’s ability to deliver consistent performance across cycles, supported by diversified demand drivers and disciplined inventory management, reinforces its appeal as a medium-term investment opportunity.

MOFSL auto stock recommendation:

 

M&M 

Target Price: ₹4,275

 

Mahindra & Mahindra Limited has outlined an ambitious long-term growth plan, targeting an eightfold expansion in sports utility vehicles (SUVs) and Light Commercial Vehicles and a threefold increase in its Farm business over FY20–30, translating to roughly 12 per cent annual revenue growth. This outlook is supported by upcoming launches such as the XEV 9S, the NU-IQ platform from 2027, and a 1.6 times rise in sub-3.5-tonne volumes. Its high-growth verticals are also scaling quickly—Last Mile Mobility is aiming for a sixfold increase in revenue, Trucks and Bus is working toward a top-three position in ILCVs, Aerostructures is pursuing a global top-ten ranking, Mahindra Holidays is targeting three times keys and revenue with four times Profit After Tax (PAT) growth, and Lifespace plans to expand sales more than fourteenfold this decade. Management also plans to enter one new segment next year, aligned with its objective of delivering a sustainable 18 per cent Return on Equity (ROE). With these strong structural growth drivers, Mahindra & Mahindra continues to remain an attractive long-term story.      ===============

  Disclaimer: This article is by Motilal Oswal Financial Services Research Desk. Views expressed are their own.