Passenger vehicles, Motorcycles Lead Q3FY26 Auto Recovery on GST 2.0 Support: PL Capital
PL Capital, one of India’s most trusted financial services organizations, in its latest Report titled “Automobile Oct-Dec’25 Earnings Preview”, cited that India’s automobile industry reported a strong performance during the October–December 2025 quarter, driven by GST 2.0 rate rationalisation, a pickup in rural demand and sustained festive momentum. Improved affordability, easing financing conditions and a recovery in consumer sentiment supported broad-based volume growth across passenger vehicles, two-wheelers and commercial vehicles, although rising raw material costs are expected to weigh on margins in the coming quarters.
The implementation of GST 2.0 provided a meaningful boost to demand during the festive season, with price reductions encouraging buyers across categories. This was complemented by favourable macroeconomic conditions, including benign inflation and lower policy rates, which improved access to vehicle financing. On the rural front, a healthy Kharif harvest and better Rabi sowing acreage strengthened farm incomes and cash flows, translating into improved demand for entry-level vehicles and tractors. OEMs also benefited from new model launches, facelifts and improved realisations, while exports remained stable and the rupee weakened.
Passenger vehicles emerged as a key growth driver during the quarter, with industry volumes rising nearly 20 percent year-on-year. Reduced prices following GST cuts, combined with year-end discounts offered by manufacturers ahead of model-year changes, made vehicle purchases more attractive for consumers. Importantly, inventory levels corrected sharply, declining to around 45 days in November and further to about 38 days in December, compared with over 55 days in recent months. While the GST benefits were more pronounced for small cars, SUVs continued to dominate demand, reinforcing the ongoing premiumisation trend in the domestic market.
The two-wheeler segment also posted a strong rebound, recording high-teen year-on-year growth during the quarter. Motorcycle sales gained momentum, particularly in the 150cc and higher segments, reflecting consumer upgrading behaviour amid improving affordability and income visibility. Inventory levels across dealerships remained lean following strong festive retail sales in October and November. As per PL Capital inputs, some in-demand models or variants faced extended waiting periods; consequently, the stronger than expected wholesale volumes in December were largely driven by re-stocking activity.
Commercial vehicles showed early signs of an upcycle during Q3FY26, supported by a revival in construction and mining activity after an extended monsoon season. Medium and heavy commercial vehicles outperformed light commercial vehicles as replacement demand picked up and customers opted for higher-tonnage vehicles. Improved affordability following GST rate rationalisation also encouraged fleet operators to advance purchase decisions. Construction equipment sales showed visible improvement, although growth remained muted on a high base due to pre-buying ahead of emission norm changes last year. Tractor sales continued their upward trajectory, aided by state subsidies and supportive government policies.
While revenue growth remained strong across segments, margin performance came under pressure from rising input costs. Prices of key raw materials such as aluminium, copper and precious metals, including platinum group metals, increased significantly in recent months due to global supply constraints and higher demand. Although the impact on margins in Q3FY26 is expected to be partially cushioned by inventory benefits and hedging strategies, PL Capital believes the full effect of cost inflation is likely to be felt in subsequent quarters, particularly with the reintroduction of steel safeguard duties from January 2026.
Among leading OEMs, Mahindra & Mahindra benefited from strong demand for SUVs and robust tractor volumes, while TVS Motor Company continued to gain market share across segments, supported by strong domestic sales and export growth. Hero MotoCorp reported healthy motorcycle volumes, aided by an improved product mix and gradual traction in electric two-wheelers. Maruti Suzuki saw a revival in small car volumes following GST cuts, alongside steady export performance, although margin expansion remains a key monitorable.
Looking ahead, PL Capital expects the automobile sector to sustain healthy growth momentum, supported by improving rural demand, easing interest rates and a steady pipeline of new launches across internal combustion engine and electric vehicle platforms. However, the ability of manufacturers to manage rising input costs and maintain margins will remain a critical factor shaping earnings performance in the coming quarters. Based on its assessment, PL Capital’s preferred picks in the sector are TVS Motor Company, Mahindra & Mahindra and Hero MotoCorp, reflecting their strong growth visibility and relative resilience amid cost pressures.
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