Auto stocks were among the weakest links in the Indian stock markets for 3 months now. Will Q3 results rev up sentiments?
Auto stocks have been underperforming in the market for the past three months due to high valuations and concerns about demand. The Nifty Auto Index has dropped nearly 10% in this period, compared to a 4% decrease in the benchmark Nifty.
Two-wheeler companies, such as Hero MotoCorp and Bajaj Auto, have been hit the hardest, with their shares falling over 20%. Analysts have noted slow growth in the sector since Q1, which continued into Q2. Bajaj Auto, India’s largest two-wheeler maker, even predicted lower sales growth in its second-quarter results, contributing to the negative sentiment.
With the exception of Mahindra & Mahindra, which has a presence in the commercial vehicle sector that has not been as severely impacted, most auto stocks have seen negative returns over the past three months. Maruti Suzuki and Tata Motors, key players in the passenger vehicle segment, saw their shares drop by 6% and 16%, respectively.
Despite this, the beginning of 2025 has shown some promise for auto stocks, as December sales figures exceeded expectations for many companies. The auto index has risen by nearly 3% since the start of the year.
Looking ahead to the third quarter, Indian auto original equipment manufacturers (OEMs) are anticipating a mixed performance. Analysts predict that passenger vehicles and tractors will benefit from festive season demand, while two-wheelers and commercial vehicles may face challenges due to cost pressures and slower demand, although slightly improved from previous quarters.
Overall, modest revenue growth, stable commodity prices, and some margin pressures are expected to influence results for the quarter ending in December, with passenger vehicles likely to be the standout segment.
The demand for this segment was primarily driven by festive purchases and a reliable supply chain. In contrast, the recovery in rural areas has had a positive impact on tractor sales, while two-wheelers and commercial vehicles (CVs) are still struggling due to weak demand and inventory adjustments.
Passenger vehicle sales have seen a growth of around 7% year-over-year. Motilal Oswal predicts that Maruti Suzuki will benefit the most from the festive season, with an expected 11% year-over-year growth in profits. Analysts also believe that Maruti’s focus on upcoming electric vehicle launches will boost investor confidence in the medium term.
Tractor sales have experienced a strong resurgence, with a 14% year-over-year increase in volumes, reflecting an improvement in rural demand. Mahindra & Mahindra (M&M) is expected to perform well in this sector, with its tractor segment driving an estimated 30% year-over-year earnings growth, supported by higher prices and steady rural recovery.
On the other hand, the two-wheeler segment is expected to see a modest 3% year-over-year volume growth, hindered by inventory adjustments and weak urban demand. Rural-focused original equipment manufacturers (OEMs) may fare better in this challenging environment, according to Nuvama Research.
Commercial vehicles are forecasted to have stagnant growth, as low replacement demand and high financing costs continue to impact the sector. Tata Motors, a major player in the CV market, is expected to see modest revenue growth but may struggle to maintain margins.
In the third quarter, some OEMs may face margin pressure due to marketing expenses during the festive season and higher input costs in certain segments, despite the stabilization of commodity prices.
Which stocks should investors keep an eye on?
Analysts are optimistic about large-cap OEMs that have a strong presence in rural markets and stable profit margins. Motilal Oswal recommends M&M and Maruti Suzuki as top choices due to their diverse product offerings and consistent demand projections. In the two-wheeler sector, TVS Motor stands out for its strong presence in rural areas and consistent growth trajectory.
Looking ahead, investors should pay close attention to management updates regarding rural market recovery and pricing strategies. These factors will play a crucial role in shaping investor sentiment in the upcoming quarters.
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Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.