“We believe that macroeconomic stimulus measures such as an income tax cut, an interest rate cut and a pay commission review will drive a recovery in the two-to-three year demand cycle and therefore we reiterate our Overweight rating for the sector as the price-to-earnings valuation is just above the 10-year average,” the report said.
In the second quarter of FY26, the industry posted strong double-digit net sales growth for Original Equipment Manufacturers (OEMs) year-on-year, helped by an early festive season and increased customer base due to the GST rate reduction.While rising raw material costs impacted gross margins during the period, operating leverage helped support EBITDA margins.
Industry management commentary shows that two-wheeler sales volumes grew in the mid-teens during the festive period from August to mid-November 2025, while the passenger car segment lagged behind, registering only single-digit growth. The policy environment is also expected to support purchasing power and consumer confidence. In October, the Union Cabinet approved the terms of reference for the 8th Central Pay Commission, which will recommend revisions in salaries and benefits for central government employees. Such revisions typically increase disposable income and support consumer spending on high-value items, including cars.
Moreover, in September the government introduced the second generation of Goods and Services Tax reforms, lowering tax brackets to benefit consumers.
The government reduced tax rates on several categories of cars, especially small cars, two-wheelers (up to 350 cc) and commercial vehicles, by changing the rate from 28 percent (plus applicable tax) to a uniform 18 percent.
The revised GST structure came into effect on September 22, after the 56th GST Council meeting.
According to the report, these combined measures could provide lasting support to demand and strengthen the automotive industry’s growth prospects in the medium term.
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