Auto sector shifts gears in Q3; TVS Motors, Maruti Suzuki top buys, says Siddhartha Khemka

India’s automobile sector has staged a strong recovery in the third quarter, supported by a timely GST rate cut around the festive season, healthy retail traction and disciplined inventory management.Demand revival has been broad-based across two-wheelers, passenger vehicles and commercial vehicles, with volumes expanding sharply year-on-year during the quarter. Two-wheeler internal combustion engine volumes rose in the mid-teens, passenger vehicles posted over 20% growth, and commercial vehicles also delivered a robust rebound off a weak base.Importantly, retail demand remained firm even after the festive months, keeping dealer inventories lean and supporting steady wholesale momentum into the fourth quarter, aided by the ongoing wedding season.Within two-wheelers, scooters continue to outpace motorcycles on a year-to-date basis, while mopeds remain subdued. Growth is increasingly skewed toward premium and mid-capacity motorcycles, with the 150–250cc segment emerging as one of the fastest-growing categories after a sharp turnaround in the second half of the year.The >250cc segment has also sustained healthy double-digit expansion, reflecting resilient discretionary demand. Entry-level motorcycle categories, however, remain mixed, highlighting a gradual rather than uniform recovery in mass segments.Passenger vehicles have benefited from strong traction in utility vehicles, which now account for roughly two-thirds of the overall mix. Both cars and UVs saw a sharp rebound in the quarter, translating into mid-single-digit growth year-to-date.New launches, model refreshes and improving consumer sentiment have aided momentum, while select legacy models continue to face pressure. Electric variants in the UV space are also gaining incremental traction, though still from a relatively small base.Commercial vehicles have recorded a steady recovery, with most sub-segments posting high single- to low double-digit growth year-to-date. Goods carriers have benefited from improving freight activity, while the passenger bus segment has seen selective outperformance driven by replacement demand and regional procurement.Key growth drivers include tax rationalisation, improving affordability, sustained retail footfalls post-festive season and tighter channel inventories.At the same time, challenges persist in the form of uneven recovery across entry-level categories and heightened competitive intensity in popular sub-segments, which could cap near-term pricing power.Structurally, the sector is witnessing a shift toward higher-displacement motorcycles, a rising utility vehicle mix in passenger cars, and gradual electrification in select categories.With inventories lean and discounting expected to moderate gradually, the medium-term outlook remains constructive, supported by demand normalization, product pipeline strength and improving operating leverage as volumes scale.TVS Motors- TP: 4500TVS Motor has been the only domestic 2W OEM to consistently gain market share across key segments over the past decade, supported by strong execution and brand-building.This has translated into an earnings CAGR of ~23% and a sharp improvement in RoCE to ~36% from ~22% over the past decade, highlighting the quality and sustainability of growth. For Q3FY26, EBIT margin has expanded from ~8% in FY19 to ~12.3% in FY25 and ~12.6% in 1HFY26.Backed by cost initiatives and operating leverage, we expect margins to improve by ~150bp to ~13.8% by FY28E. We estimate TVS to deliver a revenue/EBITDA/PAT CAGR of ~21%/26%/29% over FY25–28E, driven by sustained market share gains, a strong launch pipeline and gradual margin expansion.Maruti Suzuki- TP: 19,937Maruti Suzuki continues to demonstrate its leadership strength in India’s passenger vehicle market, supported by a strong product mix, revived small-car demand, and expanding export base. In 2QFY26, revenue grew 13% YoY with EBITDA margin at 10.5%, ahead of estimates, driven by higher realizations and cost control, while PAT remained broadly in line.The GST rate cut has significantly boosted affordability in the small-car segment, leading to a strong festive season with over 400k retail sales. The newly launched Victoris and e-Vitara models have further enhanced MSIL’s SUV positioning, while exports surged 42% YoY and are on track to exceed guidance.With its robust SUV pipeline, multi-technology approach (CNG, hybrid, EV), and long-term focus on achieving a 50% PV market share, we reiterate BUY, expecting a 17.5% earnings CAGR over FY25–28E.(The author is Head of Research - Wealth Management, Motilal Oswal Financial Services)(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)