Auto stocks are correcting, but it's not a clearance sale yet.

Foreign Institutional Investors (FIIs) continued selling automobile and auto component stocks for the seventh month in February by offloading shares worth $454 million.

The sector that lost FII interest in August 2024 saw the heaviest net equity outflows in October 2024, at $1.24 billion, according to data from National Securities Depository Ltd (NSDL).

To be sure, FIIs sold Indian equities worth $5.35 billion in February, most in the construction sector at $826 million. They, however, invested $917 million into telecom equipment stocks, showed NSDL data.

Overall, FIIs have sold Indian equities worth over $18 billion since August 2024.

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Meanwhile, domestic institutional investors (DIIs), which have been anchoring Indian markets amid the FII exodus, too, have been careful and selective about their exposure to auto and ancillary sectors.

Mixed sentiment

Mutual fund holding data showed a split in sentiment among domestic investors.

While mutual fund stakes have declined in stocks such as Sundaram Clayton (from 19.08% in November to 17.40% in January), Exide Industries (12.46% to 11.92%), Cartrade Tech (16.96% to 15.71%), and Ola Electric Mobility (4.21% to 3.49%), their interest has risen in stocks such as Sundaram Fasteners (16.60% to 17.17%), Fiem Industries (3.89% to 4.42%), and Sona BLW Precisions (24.63% to 27.04%), showed data from Prime Database.

An earnings downgrade could be keeping investors away.

According to a 5 March JM Financial report, 2025-26 earnings per share estimates were cut for 30 Nifty 50 companies in February 2025, with five out of six automobile firms in the index witnessing a downward revision.

“The growth slowdown is undeniable," said Nitin Arora, fund manager at Axis Mutual Fund, adding that some business models are holding up well despite the weak environment.

While the auto sector lacks a clear tailwind, auto ancillary stocks offer better growth visibility than original equipment makers, with a potential export recovery likely to accelerate the rebound. The premiumization trend also appears more promising within auto ancillaries, he noted.

Though the sector-specific sentiment has slipped back to pre-covid levels, Arora believes rate cuts and larger tax breaks can provide the much-needed boost and also act as potential catalysts for a turnaround.

Except for Eicher Motors and Maruti Suzuki India, which have risen over 3% and 6% year-to-date, all Nifty Auto Index constituents have posted negative returns, according to data from Capitaline.

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The Nifty Auto Index, on the other hand, has tanked 9% against the Nifty 50's near 6% fall.

The long-term outlook

Factory dispatches for the month of February show the tractor segment outperformed other auto segments, driven by strong rabi sowing, higher water levels in key reservoirs, and continued government support, according to analysts.

While Mahindra and Mahindra (M&M) posted an 18% on-year rise in total tractor sales, Escorts Kubota recorded an 11% jump.

For two-wheelers, it was a mixed bag. While Hero MotoCorp stumbled with a 17% drop in sales, TVS Motor and Eicher Motors cruised ahead, recording strong growth of 10% and 19%, respectively.

In the passenger vehicles (PV) space, M&M secured the pole position with a 19% jump in sales, whereas Maruti Suzuki barely stayed in the green with a 1% rise. Tata Motors and Hyundai saw sales decline by 9% and 3%, respectively.

In the commercial vehicle segment, Eicher Motors-VECV and M&M held their own, with their sales climbing 9% and 4%, respectively. Tata Motors’ sales slumped 7%, while Ashok Leyland eked out a 2% gain.

However, on the ground, auto retail sales fell 7% year-on-year in February, with tractors taking the biggest hit, down 14.5%, followed by passenger vehicles (-10%), commercial vehicles (-9%), and two-wheelers (-6%), the Federation of Automobile Dealers Associations (Fada), which tracks retail auto sales, said in its monthly update in March.

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"Dealer expectations for March 2025 are cautiously optimistic, with nearly 45% predicting growth, 40% foreseeing flat performance, and 14% anticipating de-growth," Fada said in the release.

Kotak Institutional Equities also maintained a cautious view in its 3 March report. Even though the wholesale volume print in PV, CV and two-wheeler segments was modest, led by channel filling, retail demand showed weak trends in February, the domestic brokerage highlighted.

Manoj Garg, director of investments at WhiteOak Capital, expects the two-wheeler slowdown to keep weighing on stock prices, even as some companies perform well despite expensive valuations. In the four-wheeler space, sport utility vehicles (SUVs) are outperforming hatchbacks, making companies with a strong SUV line-up better positioned to capitalize on this trend.

He also sees attractive investment opportunities emerging in select sub-sectors due to interest rate cuts, easing valuations, and a government push through income tax reductions.

However, Jay Kale of Elara Capital differed. Income tax cuts are unlikely to lift PV sales much, as the rising cost of vehicles remains a concern. For medium and heavy commercial vehicles, rate cuts and higher government spending should help, but the dedicated freight corridors (DFC) could pressure the truck segment, Kale said in a 23 February report.

He said in the report that the PV industry is expected to grow by 1-2% in 2025-26 (lower than Street estimates of around 5-7% growth), two-wheelers by 8-10% (largely as estimated), three-wheelers by 6-8% (largely as estimated) and commercial vehicles by 4-5% (mainly in line).

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He expects the now-over Maha Kumbh in Uttar Pradesh to boost two-wheeler demand in the June quarter, though first-time PV buyer growth may remain weak, weighing on the overall outlook.