Domestic Auto Sector Strong Growth Ahead: Report

The domestic auto sector, especially the two-wheeler and tractor markets, is forecasted to experience strong growth from FY24 to FY27, with two-wheelers and tractors showing higher CAGR than wider industry trends, per Jefferies report. EV momentum and easing input costs further bolster the outlook.

The domestic auto sector, especially the two-wheeler and tractor segments, is set for robust growth, according to a Jefferies report. Over FY24-27, the sector is expected to achieve a compound annual growth rate of 14% and 10% respectively, outpacing the broader industry.

India's two-wheeler demand, previously lagging due to the COVID-19 pandemic and rising regulatory costs, is witnessing a resurgence. In FY24, two-wheeler wholesales grew 14% year-on-year, outperforming passenger vehicles' 8% growth. However, two-wheeler volumes remain 13% below FY19 peaks, while passenger vehicle volumes are up 25%.

Looking forward, two-wheelers are projected to achieve a 14% CAGR over FY24-27, compared to 7% for passenger vehicles and 4% for trucks. Tractors also shine, expected to grow by 6% in FY25 and a 12% CAGR in FY26-27, supported by strong rural demand.

The electric vehicle (EV) market in India's two-wheeler sector is growing, with EVs' share rising from 0.4% in FY21 to 5% by Q1 CY23. While government incentives and new launches spurred growth, recent reductions in subsidies have slowed momentum, keeping EVs' share between 4-7% over the last two years.

Nevertheless, EV sales are expected to grow, reaching 7% in FY25, 10% in FY26, and 13% in FY27. EV adoption in the passenger vehicle segment has been slower, comprising around 2% of total sales.

The auto sector faced margin pressures from FY21-23 due to weak demand and rising metal prices. Prices for steel, aluminum, and precious metals surged between mid-2020 and April 2022, impacting auto OEMs. Since then, prices have moderated, reducing the pressure.

EBITDA margins for most auto OEMs increased by 1-4 percentage points year-on-year in FY24 and are expected to improve further by 40-210 basis points over FY24-27, driven by recovering demand and stable input costs.