Automobiles & Components Sector Update : Affordability boost to drive demand by Kotak Institutional Equities
Affordability boost to drive demand
We expect domestic PV segment volumes to accelerate from 2HFY26E onwards, growing by 4-5% in FY2026E and 7% CAGR over FY2026-28E, driven by GST cuts, income tax relief and 8th Pay Commission norms. These factors should improve affordability and revive first-time and replacement demand. In terms of segment, we expect premium hatches and the compact SUV segment to outperform. Additionally, we expect LCV and tractor segment growth to accelerate, driven by lower costs, e-commerce uptick and strong farm economics. However, the M&HCV truck segment will see limited benefits.
Pickup in demand momentum for domestic PV segment ahead
We expect domestic PV segment volumes to accelerate from 2HFY26E onwards, with growth rising to 4-5% in FY2026E (versus 3% earlier) and 7% CAGR over FY2026-28E (5.5% CAGR earlier). This will be driven by GST cuts (for small PVs from 29-31% to 18% and for larger PVs from 43-50% to 40%), income tax reductions and 8th Pay Commission norms. We believe a decline of 2-10% for vehicle prices will stimulate both first-time and replacement demand. We expect premium hatchbacks and compact SUVs to benefit the most, whereas larger SUVs/MPVs should maintain their momentum.
Market share to remain broadly stable, with select gains in PV segment
Overall, we expect market shares to remain stable across most OEMs. We expect MSIL and HMIL to gain marginally, whereas Tata Motors is expected to lose its market share over FY2025-28E. MSIL’s market share improvement will be driven by new SUV launches and recovery in hatchback/sedan segments. TTMT will continue to lose on weaker product momentum and competitive pressure in the SUV segment. MM will maintain its market share, whereas we expect HMIL market share to recover from FY2027E, driven by newer launches.
LCV and tractor segments to shine; limited benefits for M&HCV segment
The GST reset will benefit the domestic tractor and LCV segments. We expect LCV segment growth to accelerate to 6-7% on lower acquisition cost and e-commerce expansion, whereas the tractor segment may sustain its momentum supported by strong farm economics, a favorable monsoon outlook and GST cuts in farm implements that will favor organized players. However, M&HCV truck demand may have a marginally negative impact from large fleet operators already availing ITC, as freight rates may come under pressure given the B2B nature of the business, impacting their profitability and cash flows. Small fleet operators will benefit with lower upfront and operating costs, assuming stable freight rates.
Increase our FY2026-28 EPS estimates by 1-9% for 4W OEMs
We have increased our FY2026-28 EPS estimates by 2-9% for 4W OEMs—MSIL (4-9%), MM (2-5%), HMIL (3-5%), TTMT (2%), AL (1-3%) and ESC (2-4%). We maintain ratings on MM (BUY), MSIL (ADD) and TTMT and ESC (SELL). Given the recent rally, we downgrade HMIL and AL to REDUCE (from BUY earlier).
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