Auto stocks in top gear: What’s driving the rally? Experts recommend 10 stocks to buy from the sector

Most auto stocks have been on a roll in the last one year owing to a confluence of factors, including demand revival, new launches and stable raw material prices.

The Nifty Auto index has surged 69 per cent in the last 12 months, with some of its components, such as Exide Industries, Tata Motors DVR and Bharat Forge skyrocketing about 100-140 per cent.

Out of 16 components in the index, as many as nine stocks have surged over 75 per cent in the last one year, according to Trendlyne data.

What's driving the rally in auto stocks?

Expectations of robust sales in FY25 are among the biggest factors boosting automobile stocks. A revival in the rural market has driven this surge, as forecasts of a normal monsoon and stable raw material prices promise healthy margins.

Experts believe the two-wheeler market may outshine the passenger and commercial vehicle segments in volume growth.

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Atul Parakh, the CEO of Bigul pointed out that automobile stocks have surged due to strong demand fueled by economic reopening, consumer spending shifts post-pandemic, and the transition to electric vehicles (EVs). While some frothiness exists, there could be more upside if supply chain constraints ease and EV adoption accelerates with new models/incentives in the automobile sector.

Pravesh Gour, a senior technical analyst at Swastika Investmart, believes a strong Indian economy translates into higher spending power, which drives the auto, banking, and real estate sectors. This is because people with greater incomes spend more on bikes and vehicles.

Gour pointed out that vehicle sales have increased during the past year in every category, including tractors and two-wheelers. A developing economy and greater disposable incomes are causing people to invest more money in cars.

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The Indian automobile industry has been on an impressive growth trajectory, demonstrating resilience and adaptability in a rapidly changing global market.

"In the last financial year (FY24), the domestic auto industry experienced robust growth of 12.5 per cent. The sector has taken significant strides in producing vehicles compliant with 20 per cent ethanol blends, a move that underscores the industry's alignment with global environmental goals. Furthermore, there has been a dramatic surge in the production of electric vehicles (EVs), with a 90 per cent increase in electric passenger vehicles and a 30 per cent rise in electric two-wheelers," Amit Goel, Co-Founder and Chief Global Strategist at Pace 360, observed.

Trivesh D., COO of Tradejini, sees a confluence of factors driving the surge in auto stocks.

Trivesh pointed out that despite record highs for the Nifty and Sensex, the Nifty Auto index has significantly outperformed the broader market. This reflects investor optimism surrounding the industry's strong last quarter, with expectations of single-digit growth for passenger vehicles in FY25.

Another factor, according to Trivesh, is the government's push for electric vehicles (EVs). This will benefit the auto ancillary industry, which will play a crucial role in the EV ecosystem.

"Beyond these industry-specific factors, broader economic tailwinds are also at play. The upcoming marriage season and potential government spending are all expected to boost consumer spending, positively impacting the auto sector," said Trivesh.

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Is there more steam left?

Experts expect auto stocks to remain in top gear in the medium-to-long term. In the medium term, consumer sentiment is expected to remain positive after the Lok Sabha election due to political stability, policy continuity, and healthy economic growth. Normal monsoons, stable commodity prices, and expectations of rate cuts will also augur well for the automobile industry.

"The automobile industry’s outlook for the coming year is also promising. Several companies are gearing up to launch new models, consumer sentiment is likely to remain positive post-elections, the monsoons are forecasted to be healthy, fuel prices are expected to remain steady, and interest rates are projected to fall. All these factors bode well for auto companies’ top line, bottom line, and, as a result, their stocks. With a prediction to grow at a CAGR of 10 per cent in the next five years, the auto sector stocks are forecasted to deliver strong earnings," said D. K. Mudaraddi, a research analyst at Stoxbox.

Gour pointed out that the Indian government is actively promoting electric vehicles (EVs) through programs such as the National Electric Mobility Mission Plan. Government backing is raising the investment and stock prices of companies producing electric vehicles or their components.

"The Indian automotive sector is anticipated to experience sustained expansion in the upcoming years, with a forecasted compound annual growth rate (CAGR) above 8 per cent through 2030. This optimistic forecast is bolstering investor confidence in car equities," said Gour.

As the Indian economy remains on a solid growth trajectory, the purchasing power of Indian consumers will grow. This makes the long-term outlook of the sector bright.

"India's strong GDP growth, currently placing it as the world's fifth-largest economy, signifies a healthy economic environment. This translates to increased purchasing power for consumers, particularly in sectors like real estate and automobiles. We have seen a shift in consumer preference towards SUVs, driven by Maruti Suzuki's move from basic vehicles. This, along with positive developments like Tesla's potential entry into the Indian market upon accepting tax incentives, suggests there's room for further growth in the auto sector," said Trivesh.

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Auto stocks to buy

Kripashankar Maurya, AVP-Research at Choice Broking believes stocks with a premium product portfolio are poised to outperform the industry, offering more room for upside in auto and auto ancillary stocks.

"We are bullish on Maruti Suzuki, Gabriel India, Fiem Industries, Uno Minda, and Ashok Leyland," said Maurya.

Mudaraddi is positive on Mahindra and Mahindra and Hero MotoCorp.

Mahindra and Mahindra looks attractive owing to its attractive product launches, a healthy order book in PVs, and an expectation of healthy tractor volumes, as the forecast of an above-normal monsoon bodes well.

Mudaraddi is positive about Hero MotoCorp as the two-wheeler segment is expected to outperform the auto industry led by strong domestic demand and bottoming out of export volumes, which are on the rise and already bodes well for Hero.

"The company has focused on expanding its portfolio and market share in the mid-weight segment through new products like Maverick 440 & Karizma 400 and the burgeoning over 125CC segment through Xtreme 125.

Trivesh is positive about Mahindra and Mahindra, Maruti Suzuki, Tata Motors, Bajaj Auto, and Hero MotoCorp for the medium term.

He said M&M stands out due to its production ramp-up, enabling faster order fulfilment. Their foray into the EV segment with new launches and existing model refreshes further strengthens their position.

Maruti Suzuki's strong volume growth and increasing realizations also make them an attractive investment. Similarly, Tata Motors, Bajaj Auto, and Hero MotoCorp all have the potential to benefit from the overall positive momentum in the automobile industry, said Trivesh.

Gour is positive about Maruti Suzuki, Tata Motors, Mahindra and Mahindra, Bajaj Auto and Eicher Motors, for the long term.

"The biggest automobile manufacturer in India is Maruti Suzuki. The business is in a good position to gain from India's rising need for reasonably priced automobiles. In India, the market for electric cars is expanding, and Tata Motors is making significant investments in this market. As so, Mahindra and Mahindra, Bajaj Auto, and Eicher Motor are well-positioned to profit from India's expanding auto industry demand," said Gour.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.