Early Diwali for Dalal Street: How tax cuts are turbocharging India’s auto stocks
India’s auto sector is displaying all the signs of a classic bull market. Against a 9% jump in the Nifty Consumption index and a 6% rise in the benchmark Nifty this year so far, the auto index has vaulted nearly 18%. But there are risks.
If the upheaval around H-1B visas and hand-wringing over the fate of India’s IT majors has underlined anything from an investing standpoint, it is this—sectoral tailwinds matter.
You can be a champion swimmer, but if the currents are flowing hard against you, it is the ocean and not your skill which will decide your fate. If an industry faces regulatory hostility, operational disruption or other major headwinds, even the most well-run company cannot prevent share prices from cratering.
Benjamin Graham, the original guru of value investing, once remarked that the art of investment was often believed to lie “first in the choice of those industries that are most likely to grow in the future and then in identifying the most promising companies in these industries."
Warren Buffett made the same point, but in reverse. When a management of great brilliance meets an industry of bad economics, it is the industry’s reputation that remains intact. In other words, investing without accounting for sectoral forces is like sailing with no regard for the weather, thinking that your skilled captain and sturdy boat are enough to bring you to the shore.
This is the reason why many market veterans have a simple rule-of-thumb for stock picking—a mediocre company in a strong sector is preferable to a stellar company in a weak industry.
Sectoral tailwinds, be it in the form of favourable demand, supportive regulation, supportive unit economics or a combination of the above, are among the most powerful forces in the market. They raise the baseline of returns for the entire segment, and handsomely reward the top performers.
And right now, there’s one sector where the wind is firmly at investors’ backs.
Fast lane
Diwali has arrived early for auto companies.
The country’s largest carmaker, Maruti Suzuki India Ltd, received 80,000 enquiries and delivered over 25,000 cars on 22 September—the first day of the ‘GST 2.0’ regime, coinciding with the start of the nine-day Navratri festival.
Demand for small cars has jumped 50%, and enquiries remain “very high", the company said, adding that it may even run out of stock for certain variants. This was the best response the company saw in over three decades.
Its peer, Hyundai Motor India Ltd, clocked around 11,000 dealer billings, its best single-day show in five years, while Tata Motors Ltd delivered around 10,000 cars. September has proven to be a stellar month for the original equipment manufacturers (OEMs) of cars, with shares of Maruti, Hyundai and Mahindra & Mahindra Ltd (M&M) surging to their lifetime peaks.
The most consequential nudge to the four-wheeler market this season has come from the tax front. With the GST reductions, a large swathe of vehicles has moved into lower tax brackets. Small cars (length less than 4 metres) are now taxed at 18% instead of 28%, while bigger models and luxury cars attract a flat 40% tax without cess (versus effective rates of 43%-50% previously).
This recalibration has come as a shot in the arm, particularly for first-time and value-conscious buyers, and takes some of the sting out of the price inflation that car makers passed on in recent years to meet safety and emission upgrades.
“With the announcement of the next gen GST framework, the overall outlook and sentiments have significantly shifted in favour of the sector. It largely was struggling with growth and the reduction in rates has provided a much needed tailwind to kickstart consumption," Narendra Solanki, head, fundamental research, investment services, Anand Rathi Share and Stock Brokers, told Mint.
While the GST reductions have turbocharged sentiment, the macroeconomic environment too is conducive for a revival. The Reserve Bank of India has reduced interest rates by 100-basis points in 2025 so far; an income tax relief was announced in the union budget; pay scales of government employees are set to be revised with the upcoming 8th Pay Commission. In addition, a normal monsoon this season creates a window for genuine volume revival.
Automobiles, being among the most tax-sensitive and credit-dependent discretionary purchases, are reaping the benefits of the above factors. Analysts have already nudged upwards their volume forecasts for the passenger vehicle (PV) market, which grew 2% to 4.3 million units in FY25.
“We have now raised our FY26/FY27 volume growth estimates for… PVs to 3%/8% (vs. 2%/4% earlier)," domestic brokerage Motilal Oswal said in a note earlier this month.
This demand revival matters for margins as much as it does for headline volumes. When demand is anaemic, car makers lean on discounts to move inventory; once the demand curve turns, those promotional levers are dialled back.
Less discounting, combined with steady operating leverage, should translate into healthier gross and operating margins across the PV space, particularly for manufacturers who control costs and can scale production quickly.
The premiumization trend remains robust, as seen in the unabated demand for SUVs, which account for 65% of the total PV market, while at the entry and mid segments, an expected volume push plus retreating discount pressure equals a more meaningful earnings outlook, setting the sector up for a broad re-rating.
The electrification story, meanwhile, has been given a cautious breather.
The temporary relaxation on rare-earth magnet exports from China eases an important bottleneck for motors and advanced EV components ahead of the festive season, though the relief can be a temporary one, given the hyper-volatile geopolitical situation. China’s supply posture has proved episodic, and the long run calls for diversified sourcing and domestic capability building.
On the trade front too, the auto sector is getting additional cushioning. India’s trade-diversification push, including active discussions around new free trade agreements, reduces the tail risk from tariff shocks and upstream disruptions. That should help stabilise component sourcing and export opportunities for certain vehicle segments, even as global protectionist tendencies need to be watched.
“India’s automobile sector is currently at a favourable inflection point, underpinned by a combination of structural reforms, supportive policies, and shifting consumer preferences," Saji John, research analyst, Geojit Investments, told Mint.
“Technological innovations, including ferrite-based magnets, are also mitigating global supply constraints by offering alternatives to rare-earth magnets. Furthermore, the government’s strong push for electrification continues to accelerate EV adoption. Together, these dynamics position the sector for robust growth in the near term," he added.
- September has proven to be a stellar month for India’s carmakers. They have reported good billings, and shares of Maruti, Hyundai and Mahindra & Mahindra have surged.
- At $57 billion, Maruti Suzuki not only has a higher market valuation than its parent Suzuki Motor ($28 billion), but also US auto giant Ford Motor ($48 billion).
- The most consequential nudge to the auto market this season has come from the GST reductions.
- The macroeconomic environment, too, has favoured carmakers and the fundamental undercurrents for the sector remain strong.
- In markets, it’s not about what you buy, but what you pay. Analysts say investors should look at PE multiples of auto stocks in relation to their historical averages.
Maruti’s jump
The government’s moves to give a fillip to the consumption sector is playing out on Dalal Street as well, with autos the conspicuous gainers.
Against a 9% jump in the Nifty Consumption index and a 6% rise in the benchmark Nifty this year so far, the auto index has vaulted nearly 18%. The country’s largest car-maker Maruti Suzuki is up 49% year-to-date—a remarkable feat for a large-cap stock with a market cap of over ₹5 trillion ($57 billion).
Incidentally, at $57 billion, Maruti Suzuki not only has a higher market valuation than its parent Suzuki Motor ($28 billion), but also US auto giant Ford Motor ($48 billion). It is at par with global marquee names like Volkswagen and GM (each with a market cap of around $58 billion).
The Hyundai mystery
But one counter which has picked up pace, and somewhat unexpectedly, is Hyundai Motor India.
Since listing in October 2024, the Indian subsidiary of Korean giant Hyundai has not had a single quarter where its profit has grown. In the first quarter (Q1) of FY26, it reported an 8% drop in net profit at ₹1,369 crore, and also ceded the second position in the domestic sales table to homegrown M&M.
As per the latest data for August, with sales of 42,226 units, Hyundai had a market share of 13.06% in the PV segment, behind M&M (13.50%) and Maruti Suzuki (39.57%).
Despite these sobering statistics, what explains the stock’s astounding 50% jump this year?
While trying to pinpoint precise causes to stock movements is often an egregious misuse of the prefrontal cortex, market experts do offer some clues.
In a note last month, global investment bank Goldman Sachs laid out its six-point investment framework for Indian car manufacturers. The metrics are: new product launches, volume growth visibility, SUV exposure, exposure to domestic market inflections/stimulus, right to win on EVs and CO2 norms positioning.
Hyundai screens well on most of these parameters.
Take new product launches, for example.
Noting that Hyundai India lagged the industry in capacity addition during FY18-25, Goldman Sachs said with the acquisition of GM’s Talegaon plant in 2023, Hyundai is poised for a capacity expansion of 12% CAGR between 2025 to 2027, the fastest in the industry. This, in turn, is expected to trigger new product launches.
“We expect this product launch phase to trigger +120bps of market share gain in the domestic car market for HMIL from 13.0% to 14.2% over FY26E-FY28E. This gain is expected to come from Maruti Suzuki and Tata Motors, as their new product launches during this period are forecast to have minimal net impact on existing volumes, primarily due to cannibalization," it noted.
A key factor in the company’s favour is its lower discount rates compared to the market leader Maruti Suzuki, which is an indication of its aspirational brand status. This pricing power is reflected in its margins, which the stock market values more than just raw volumes. In Q1 FY26, Hyundai posted EBITDA margins of 13%, compared to 10% for Maruti.
Hyundai India has also pivoted swiftly in line with the ‘SUVisation’ of the Indian car market. It has grown its SUV mix from 0% in FY15 to 69% in FY25, faster than Maruti Suzuki’s move from 6% to 41% in the same period.
But the biggest premium the market seems to be paying for right now is the ongoing trend of electrification, where Hyundai is expected to gain from its parent’s sourcing capabilities.
“Hyundai Motor Company’s long-standing battery sourcing relationships and technology flexibility across nickel manganese cobalt, and planned lithium iron phosphate batteries, add more nuanced advantages to its right to win as the India car market transitions towards EVs," Goldman Sachs stated.
To be sure, analysts are also bullish on Maruti Suzuki and M&M with varying degrees of conviction, though the recent leg of the rally may be an indicator of the Street’s preference—Hyundai has surged 55% in the past six months, compared to 35% for Maruti and 30% for M&M.
Price vs payoff
India’s auto sector is displaying all the signs of a classic bull market—sales are growing across the board, consumer sentiment is upbeat, and policy shifts are in favour.
But from an investor’s perspective, here’s the most important question: has all the good news been priced in?
“Some parts are already priced in as far as the short term is concerned. However, the markets have not completely priced in the medium and long-term impact as it waits to see if there is sustainable traction building up in demand," Anand Rathi’s Solanki said.
That said, one of the most common errors investors make in the euphoria of a bull run is to let valuations slip into the background. Strong demand, upbeat earnings, and glowing headlines are all fine, but in markets, it’s not about what you buy, but what you pay. As Wall Street icon Howard Marks remarked, “there is no security that is so good that it can’t be overpriced".
In other words, even the best businesses can turn into poor investments if bought at the wrong price.
Analysts say investors should look at price-earnings (PE) multiples of auto stocks in relation to their historical averages, and then decide if their risk appetite and time horizon aligns with the prices on offer. The Nifty Auto index is trading at a PE ratio of 28, below its 5-year median of 32, while Maruti Suzuki is available at its 5-year median PE of 35. Hyundai Motor’s PE, however, has climbed from around 28 in May 2025 to 40 now.
Nonetheless, experts agree that the fundamental undercurrents for the sector remain strong.
“We expect an upward revision in earnings owing to higher volumes, better price realization and inventory correction, supported by favourable valuation," Geojit Investments’ Saji John said. “Our top picks are Maruti and M&M in the PV segment and Hero and TVS in the two-wheeler space."
topics
