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Premiumisation and New Launches Support Growth, But Global Headwinds Continue to Persist

We maintain our sector view to Neutral due to rising global uncertainties that are beginning to impact both costs and supply chains. One of the biggest concerns right now is China’s recent restrictions on the export of rare earth magnets, which are crucial for making electric motors used in EVs and advanced auto components. With many Indian OEMs dependent on these imports, this move is increasing input costs and creating risks of production delays, especially for EV and premium segments. At the same time, there are rising concerns around U.S. trade policies, with the potential for higher tariffs on auto-related imports. On the domestic front, the automobile sector is navigating a mix of tailwinds and headwinds. Government-driven capital expenditure is expected to support long-term demand for CVs and at the same time, a strong monsoon and higher kharif sowing are expected to boost rural incomes, which bodes well for 2W and tractor demand in the coming quarters. However, challenges like high vehicle prices and OEM-led price hikes driven by stricter emissions and safety norms are adding to the overall cost of ownership, especially for entry-level buyers. While electric vehicles continue to gain attention, adoption is still low due to limited charging infrastructure, upfront cost barriers, and evolving consumer preferences.

Q1FY26 Expectations:

* In Q1FY26, OEMs under our coverage (ex- Tata Motors) are expected to register a 7.8% YoY increase in revenue, supported by rising premiumisation trends and a pipeline of new model launches. Within this TVSL is likely to lead the pack with 20.0% YoY growth, followed by MM at 18.2% and EIM at 13.1%. In the CV segment, AL is expected to post a 4.0% YoY growth.

* On the auto ancillaries front, revenue is projected to grow by 16.4% YoY, driven by a shift towards premiumisation, leading to a rising content per vehicle. UNOMINDA is expected to lead with a growth of 22.0% YoY.

Modest Growth Driven by Premiumization and New Launches

* The OEMs under our coverage are expected to post modest results, with aggregate Revenue/EBITDA/PAT growth of 7.8%/4.1%/1.2% YoY. While input costs are gradually rising, we expect the bulk of these cost pressures to impact OEM margins in Q1. The growth for the quarter was largely driven by new model launches and an increased demand shift towards premium vehicles. Hence, 1QFY26 margins are likely to be largely driven by the product mix.

* Among our coverage companies, margins are likely to improve YoY for TVSL 217bps and MM 3bps, whereas margins may remain under pressure YoY for EIM (273bps) and MSIL (187bps).

* The PV companies under our coverage are expected to post modest results, with MM expected to show 18.2% YoY revenue growth and MSIL projected to post 2.3% YoY revenue growth. In the 2W segment, we expect TVSL to post 20.0% YoY revenue growth, followed by EIL with an expected revenue growth of 13.1% YoY. BJAUT is expected to show low single-digit growth YoY while HMCL is expected to degrow.

* The CV segment continues to face a challenging year with volume degrowth YoY, with the top 3 listed OEMs posting a 1.1% YoY decline in volumes. This slow growth is attributed to delays in infrastructure development initiatives and the postponement of fleet replacements.

Automobile Ancillaries:

* The automobile ancillaries under our coverage are projected to deliver strong growth during the quarter, driven by robust demand and a shift towards premiumization. Aggregate Revenue/EBITDA/PAT growth is expected to be 16.4%/20.3%/20.2% YoY, showcasing a healthy performance across the sector.

* Among the companies, LMAX is anticipated to lead with a significant 22.1% YoY revenue growth. LUMX is expected to post a solid 19.1% YoY revenue growth, driven by increased demand for its automotive components.

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