Synopsis: Nifty Auto has seen modest declines recently, but resilient domestic demand, steady FY27 volume growth, strong exports to emerging markets, and ongoing capacity expansions support sector optimism. Citi favours Maruti, M&M, and Hyundai despite cost pressures.
The automotive industry in India is a key contributor to the economy, encompassing passenger vehicles, commercial vehicles, and two-wheelers. It drives manufacturing, employment, and exports, while adapting to trends like electrification, rising consumer demand, and global supply chain challenges.
India’s automotive sector is expected to experience moderating growth in FY27, with overall wholesale volumes projected to rise 3% to 6%, according to data from ICRA. The ratings agency noted that this slowdown represents a gradual normalisation after the robust rebound seen in the latter half of FY26, as pent-up demand eases and inventory levels stabilise following policy-driven support measures.
The Union Budget 2026–27 lays out a structural and long‑term support framework for India’s automotive industry, focusing less on short‑term sales incentives and more on strengthening the EV ecosystem, supply chains, and manufacturing competitiveness.
It extends duty exemptions on capital goods for lithium‑ion cell manufacturing and critical minerals, helping lower EV production costs and reduce import dependence, while semiconductor and electronics manufacturing schemes (including expanded allocations for local chip ecosystem support) aim to secure crucial high‑value inputs for modern vehicles.
India’s auto industry is navigating a mix of opportunities and challenges. Strong exports to emerging markets and steady domestic demand are supporting growth, but rising commodity costs are squeezing margins. Nifty Auto is trading near 27,694, having fallen 0.2% over the past month and 2.3% in the last five days.
Citi on Auto performance and Outlook
Citi notes that the third-quarter results for the automotive sector were slightly ahead of expectations, with domestic demand showing resilience after the festive season. This suggests that consumer spending on vehicles remained strong even after the typical spike in purchases during the holidays, which is a positive signal for the industry’s short-term performance.
Looking ahead, Citi provides a FY27 volume outlook, predicting mid-single-digit growth for passenger vehicles (PVs) and high-single-digit growth for two-wheelers (2Ws). This indicates a moderate but steady expansion in the domestic vehicle market, with two-wheelers likely leading in growth due to their affordability and demand in semi-urban and rural markets.
On the exports front, Indian automotive companies are performing well in regions like Latin America, Asia, and Africa, while facing continued weakness in China and Europe. This mixed performance highlights the dependence of Indian manufacturers on emerging markets for export growth, while more developed markets remain challenging.
Citi also highlights cost pressures from commodities such as aluminium, copper, and nickel, which have led original equipment manufacturers (OEMs) to be cautious about price hikes. As a result, profit margins were compressed in the third quarter, reflecting the impact of rising input costs on profitability.
Despite these challenges, the capacity expansion theme in India remains strong, with companies like Maruti, Hyundai, Mahindra & Mahindra (M&M), and Eicher actively expanding their production capabilities. This suggests long-term optimism about domestic demand and the ability to cater to both local and export markets.
Citi identifies its top stock picks in the sector as Maruti, followed by M&M and Hyundai, indicating confidence in these companies’ growth prospects, operational efficiency, and market positioning.
In conclusion, India’s auto sector shows growth support from exports to emerging markets and steady domestic demand, but rising commodity costs are pressuring margins. The sustainability of the rally will depend on how effectively manufacturers manage costs while expanding production.
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