The auto sector is once again in focus. Original equipment manufacturers (OEMs) are seeing strong demand across segments. On the other side, auto ancillary companies are also showing stronger earnings traction.
The domestic brokerage house Motilal Oswal sees both OEMs and auto ancillaries as opportunities, but they are moving on different tracks.
As per the brokerage house report, while volume growth remains healthy for vehicle makers, component suppliers are benefiting from better margin visibility.
This marks the choice between the two segments. Let’s take a look –
Motilal Oswal: Top stocks to focus on
The brokerage house Motilal Oswal prefers select names in both vehicle makers and component suppliers.
Among original equipment manufacturers (OEMs), the top picks include Maruti Suzuki India, TVS Motor Company and Mahindra & Mahindra.
Motilal Oswal, in the auto ancillary space, has identified Samvardhana Motherson International, Motherson Wiring, and Endurance Technologies as its top picks.
These companies, according to the brokerage report, stand out due to demand visibility, execution and relative valuations.
Demand remains strong across segments
One of the key positives for the sector is demand growth. According to the brokerage report, “Aggregate auto demand for all OEMs in our coverage universe grew 23% YoY in Q4FY26. Segmental trends: Two-wheelers are up 25%, PVs up 15%, CVs up 22%, and tractors up 33%.”
This indicates that growth is not limited to one segment. Two-wheelers (2W), passenger vehicles (PVs), commercial vehicles (CVs) and tractors have all contributed to the overall rise in volumes.
The report further added, “Demand has continued to be encouraging across segments in Q4 as reflected in strong retail growth reported in Vahan.”
Earnings growth likely to slow
Even though volumes are rising, profitability is expected to grow at a slower pace, a sper Motilal Oswal.
Motilal Oswal in its report added, “However, rising input costs are likely to limit earnings growth. We expect our OEM coverage universe (ex-TMPV) to post a much slower 9% YoY earnings growth in Q4.”
The report also highlighted pressure on profitability, noting, “Aggregate EBITDA margin for our OEM coverage universe (ex TMPV) is estimated to decline by 20bp YoY to 14.1%.”
Auto ancillaries showing better trend
Compared to OEMs, auto ancillary companies are expected to deliver relatively stronger earnings growth.
Motilal Oswal report further added, auto ancillary companies are expected to see around 14% growth in revenue, along with stronger profit growth of about 20% at the operating level and 23% at the net profit level in the fourth quarter.
Some companies are likely to outperform significantly. The report noted, “In auto ancillaries, key outperformers in Q4 include Craftsman Automation (+54%), Samvardhana Motherson International (+30%), and all three mass-market tyre companies – Apollo Tyres (+45%), CEAT (+78%) and MRF (+41%).”
However, there are weak spots as well. “Key underperformer is Balkrishna Industries, which is expected to report a 10% decline in profit after tax (PAT),” the report noted.
Motilal Oswal’s auto picks: Winners and laggards among OEMs
Within OEMs, performance is not uniform. As per the report, “Earnings outperformers among OEMs (excluding Tata Motors Passenger Vehicles) include Bajaj Auto (+30%), Hero MotoCorp (+26%), TVS Motor Company (+18%), and Mahindra & Mahindra (+33%) year-on-year.”
At the same time, “Hyundai Motor India is an underperformer, with PAT declining by 27%.”
Motilal Oswal outlook turns cautious
The brokerage house Motilal Oswal report further added, “Outlook has turned cautious for the sector given the ongoing geopolitical headwinds, with the surge in input costs being the key monitorable.”
Rising crude oil prices and supply chain disruptions are emerging as key risks. The report also pointed out, “This has led to reasonable earnings cuts for our coverage universe, more so for FY27E than FY28E.”
Specific companies have already seen estimate cuts. “Major earnings per share (EPS) cuts (excluding Tata Motors Passenger Vehicles) were seen in CEAT (-22%), Hyundai Motor India (-16%) and Apollo Tyres (-14%).”
What investors should watch
According to the Motilal Oswal report, demand remains strong, but the focus is shifting towards cost pressures and margin sustainability.
Moreover, factors such as crude oil prices, raw material costs and global developments will play a key role in determining the sector’s direction.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.