Bharat Mobility Auto Expo 2025 has begun on January 17, 2025, in New Delhi. Although the auto industry hopes to boost demand by showing production-ready models, electric vehicles (EVs), and creative concept cars, analysts remain pessimistic about the industry, at least for the foreseeable future.
As industry participants modify their product portfolios with appropriate pricing, they claim that the car industry's "once-in-a-century kind of transition towards greener energies" may cause some consolidation and a decrease in demand.
"EV penetration would increase significantly if automakers addressed range anxiety, provided lifetime battery warranties, and reduced purchase costs. The initial cost of acquisition for hybrids remains expensive due to the dual driving mechanism, whilst for flexi-fuel vehicles, existing internal combustion engine (ICE) technology does not support the government's desired 30% blending," according to a channel check study by B&K Securities.
Auto Demand in the Slow Lane
Aside from that, industry analysts feel that increasing inflation and interest rates have had an impact on automobile demand. In comparison to the same month last year, total retail sales fell by 12% in December 2024. According to data from the Federation of Automobile Dealers Associations (FADA), sales of two-wheelers fell 18 percent, passenger vehicles (PV) fell 2 percent, commercial vehicles (CV) fell 5.2%, and three-wheelers fell 4.5%. This degrowth was observed in all categories except tractors.
The Association claims that supply-side issues for popular models, the growing trend toward EVs, low cash flow due to postponed agricultural payments and suspended government disbursements, and fierce pricing rivalry all had an impact on urban market volumes. The bourses also felt the effects. According to data from ACE Equity, the Nifty Auto index fell 11.76 percent on the National Stock Exchange (NSE) over the previous three months, ending on January 16. In contrast, the benchmark Nifty50 index saw a 6.6% fall over the same time frame.
The share price of Eicher Motors was the only individual stock to increase on the NSE during this time, rising 7.9%. Every other auto index stock had a decline, with Samvardhana Motherson (down 27.8%), Bajaj Auto (26.13%), Hero Moto (24.5%), and Exide Industries (24.27%) leading the pack. The declines in other equities ranged from 2.3% to 18.3%.
Going forward, Nomura analysts believe consumption demand will remain slow across segments, with lower-end segments such as entry-level two-wheelers and small cars being more impacted, while premium segments such as sports utility vehicles (SUVs), bikes with engines larger than 125cc, and EVs will grow faster.
"We anticipate 5% and 7% industry volume growth in PVs and 2Ws, respectively, in FY26. Furthermore, the growth could come at the expense of margins, since capacity utilization may fall in FY26," the brokerage added.
HDFC Securities anticipates the domestic PV business to develop at a compound annual growth rate (CAGR) of 5-7 percent over the medium term, while the domestic two-wheeler market would increase at an 8-10 percent CAGR. The firm forecasts the domestic commercial vehicle (CV) market to begin an upcycle in the next fiscal year, 2025-26 (FY26), powered by ongoing stronger economic growth and the government's focus on raising capex.
Auto Q3 Earnings Miss?
In the near term, Nomura predicts most automakers would suffer profitability shortfalls in the current fiscal year's December quarter (Q3 FY25).
"While our commodity cost index for PV/2Ws remains mostly steady compared to Q2FY25, we anticipate margin erosion from a poorer mix and larger discounts in Q3FY25. Consequently, earnings growth is expected to be harmed. Compared to Bloomberg consensus Q3 projections, we expect Ashok Leyland will outperform, while Maruti Suzuki India, Bajaj Auto, Hyundai India, and Eicher Motors will most likely underperform," the global brokerage stated.
Given this, Nomura's top recommendation for auto stocks remains Mahindra and Mahindra (M&M), followed by Hyundai Motor India. HDFC Securities, on the other side, is betting on Maruti Suzuki, Bharat Forge, Hero MotoCorp, and Ashok Leyland. All stocks are rated 'Buy'.
