Nomura Picks Top Auto Stocks as Maruti, M&M Expect 1% YoY PV Growth in FY26

The Indian automobile sector is at a crucial juncture as leading automakers, including Maruti Suzuki and Mahindra & Mahindra (M&M), forecast a modest 1-1.5% year-on-year (YoY) growth in passenger vehicle (PV) sales for FY26. This conservative estimate is driven by concerns over vehicle affordability, rising input costs, and global economic headwinds. Amid this backdrop, Japanese brokerage firm Nomura has released its latest report identifying key players in the Indian auto market that are best positioned to navigate these challenges. The report highlights Mahindra & Mahindra (M&M) as its top pick, thanks to its strong presence in the sports utility vehicle (SUV) and electric vehicle (EV) segments.

In this comprehensive analysis, we delve into the factors influencing PV sales, the impact of rising vehicle costs, the outlook for the two-wheeler and commercial vehicle (CV) segments, and Nomura’s investment recommendations.

Current State of the Indian Auto Industry

The Indian automobile industry has witnessed significant transformations over the past decade. From a surge in demand post-pandemic to challenges posed by semiconductor shortages and fluctuating raw material costs, the sector has navigated multiple hurdles.

However, the latest projections suggest that PV sales growth in FY26 will be relatively muted, as factors such as declining affordability, increasing financing constraints, and changing consumer preferences come into play.

Decline in First-Time Car Buyers

One of the most striking trends in the Indian auto sector is the declining share of first-time car buyers. According to industry data:

• In FY19, first-time buyers comprised 47% of total car purchases.
• By FY25, this number had dropped to 40%.

This shift is primarily attributed to rising vehicle prices. Over the last six years, car prices have surged by 60-70%, making it increasingly difficult for first-time buyers to afford new vehicles. The situation has been further exacerbated by higher insurance and registration costs.

Impact of Macroeconomic Factors

The Indian auto industry is also grappling with broader macroeconomic challenges:

• Weakening Indian Rupee: The depreciation of the rupee against the US dollar has increased the cost of imported components, impacting manufacturers’ bottom lines.
• Rising Interest Rates: Higher borrowing costs have made vehicle financing less attractive, discouraging potential buyers.
• Economic Slowdown: While India’s GDP growth remains strong, consumer sentiment has weakened due to inflation and job market uncertainties.

Nomura’s Top Pick: Mahindra & Mahindra (M&M)

Despite the challenging environment, Nomura remains bullish on Mahindra & Mahindra for several reasons:

Dominance in the SUV Segment

M&M has emerged as a leader in India’s SUV market, with models like the Scorpio-N, Thar, XUV700, and Bolero capturing significant market share. The SUV segment has shown resilience, driven by changing consumer preferences favoring larger, more feature-rich vehicles.

Strong EV Strategy

M&M has also made substantial investments in the electric vehicle (EV) space. The company has committed to launching multiple EV models under its Born Electric Vision, aiming to challenge rivals like Tata Motors and Hyundai in the rapidly growing EV segment. Nomura believes M&M’s early mover advantage and focus on SUVs will help it sustain long-term growth.

Financial Stability

M&M’s robust balance sheet and diversified business portfolio, which includes tractors and commercial vehicles, provide a cushion against market volatility. The company’s strong financials make it an attractive pick for long-term investors.

Other Auto Segments: Two-Wheelers and Commercial Vehicles

While the PV segment is expected to see slow growth, the two-wheeler and commercial vehicle (CV) segments present a more optimistic outlook.

Two-Wheeler Market: Poised for Growth

The two-wheeler industry is set to experience higher growth compared to PVs. Leading manufacturers have shared their growth projections for FY26:

• TVS Motor: Expects 9-10% YoY growth.
• Hero MotoCorp: Forecasts 7-8% YoY growth.

Several factors are driving this positive trend:

• Income Tax Reductions: Recent tax cuts have improved disposable income, boosting demand for entry-level motorcycles and scooters.
• Cultural and Seasonal Demand: Events like the Maha Kumbh in Uttar Pradesh and an extended marriage season are expected to drive two-wheeler sales.
• Rural Market Revival: Higher minimum support prices (MSPs) for crops and improved rural incomes are likely to boost demand in semi-urban and rural areas.

Commercial Vehicle (CV) Market: Steady Growth Expected

The CV segment is another area where Nomura sees potential for growth. The brokerage firm highlights the following key factors driving CV demand:

• Increased Government Infrastructure Spending: Ongoing projects in roads, railways, and urban infrastructure are expected to drive demand for heavy-duty trucks and construction vehicles.
• Interest Rate Reductions: Expected rate cuts in FY26 could make commercial vehicle financing more attractive.
• Revival of the Bus Segment: With urban mobility projects gaining momentum, bus sales are projected to witness double-digit growth.

Major CV manufacturers have provided the following growth estimates:

• Tata Motors: Expects 4% YoY growth in CV sales.
• Ashok Leyland: Forecasts single-digit growth in trucks and double-digit growth in buses.

Nomura has assigned ‘Buy’ ratings to both Tata Motors and Ashok Leyland, citing their strong market positioning and growth potential.

Stock Market Performance: Auto Stocks Show Resilience

Despite the cautious outlook for PV growth, auto stocks have shown resilience in the Indian stock market. As of 2:15 PM IST, the Nifty Auto Index had recovered from early losses, trading 1% higher at 22,042.

Top Gainers in the Auto Sector

• M&M: Up nearly 3%, driven by positive sentiment around its SUV and EV strategy.
• Samvardhana Motherson: Gained 2.4%, benefiting from strong demand in the auto components sector.
• Bajaj Auto: Increased 1.5%, supported by a positive outlook for the two-wheeler segment.
• Tata Motors: Rose 1.45%, fueled by strong demand in both the PV and CV segments.
• Eicher Motors, TVS Motor, Hero MotoCorp, and Ashok Leyland: Also witnessed gains, reflecting overall optimism in select areas of the auto industry.

Conclusion: A Sector in Transition

The Indian automobile industry is undergoing a significant transformation, shaped by shifting consumer preferences, economic factors, and evolving government policies. While the passenger vehicle segment faces headwinds, the two-wheeler and commercial vehicle segments are expected to drive growth in FY26.

Nomura’s strategic focus on M&M highlights confidence in the company’s SUV and EV strategy, while its positive stance on Tata Motors and Ashok Leyland underlines the potential in the commercial vehicle market.

For investors, sector-specific opportunities remain, particularly in SUVs, electric vehicles, two-wheelers, and commercial vehicles. The overall outlook suggests a period of consolidation and selective growth, making careful stock selection crucial for maximizing returns in the coming years.

Stock market investments are subject to market risks. It is advisable to consult a financial advisor before making investment decisions.