Auto stocks: Festive demand gets a low-base boost; can earnings justify valuations?

India’s automobile sector has entered the festive season on a strong footing, but the sharp jump in September retail sales comes with an important caveat: last year’s GST-related purchase deferrals created an unusually low base.

Automobile retail sales grew 81.8% year-on-year during September 1–23, 2026, according to an early estimate by Choice Institutional Equities based on VAHAN data. Two-wheeler sales surged 91.6%, while passenger vehicle sales more than doubled, rising 102.5%. Commercial vehicle sales grew 51%, three-wheelers increased 30.7%, and tractor sales rose 4.3%.

September growth masks a low-base effect

The headline numbers, however, are significantly distorted by the low base. In September 2025, buyers deferred purchases ahead of the revised GST rates that took effect on September 22, resulting in an unusually weak first part of the month and a sharp catch-up towards the end.


Choice expects full-month growth to moderate to around 30%, supported by the low base in September 2025, steady consumer sentiment, recent model launches, strong EV adoption, softer interest rates and improved affordability following GST rationalisation.

The brokerage expects the Q2FY27 outlook to remain positive, supported by strong demand, a lower year-on-year base for July–September 2026 and festival-led demand in the second half of the quarter.

Choice also cautioned that the September 1–23 figures are provisional and subject to change as additional registrations are recorded. Historically, the last seven days of September have accounted for around 24–25% of the month's volume. In September 2025, however, the last seven days accounted for around 46% of total volume because of deferred purchases.

Subhash Gate, Analyst – Autos at Choice Institutional Equities, said the underlying growth picture is healthier than the headline number suggests.

“The 81.8% YoY growth in retail registrations during 1–23 September is significantly distorted by the low base. Last year, buyers deferred purchases ahead of the GST rate changes that took effect on 22 September 2025, resulting in an unusually weak first part of the month and a sharp late-month catch-up,” Gate said.

Based on Choice’s normalisation, underlying growth is closer to 30%, implying that roughly 52 percentage points of the reported 82% growth reflects the base effect. Gate cautioned that this is an estimate rather than a precise separation of the base effect from incremental demand.

“The underlying momentum remains healthy, particularly in two-wheelers and passenger vehicles. However, the recovery is uneven: tractor growth was only 4.3% and three-wheeler growth 30.7% in the period,” Gate said.

The 15% national monsoon rainfall deficit also remains a risk to rural purchasing power and post-festive demand, according to Gate.

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Festive demand versus the earnings test

Narendra Solanki, Head – Fundamental Research, Investment Services, Anand Rathi Share and Stock Brokers, expects domestic momentum to remain strong in the near term, supported by end-user demand and inventory stocking ahead of the festive season. At the same time, he expects some moderation in the second half of FY27 because of the higher base last year.

“Although the domestic momentum is expected to remain strong on back of both end user demand and inventory stocking ahead of festival season. However there could be some moderation in the second half of FY27 due to the high base last year. Overall premiumisation, rural recovery and shift to EV trend should continue to provide momentum to the sector,” Solanki said.

For auto stocks, the focus is likely to shift from headline festive sales to how retail demand translates into earnings, margins and market-share gains, according to Gate.

“The next leg for auto stocks will depend less on headline festive growth and more on how retail demand translates into earnings, margins and market-share gains,” Gate said.

Gate said investors should assess cumulative September–November retail performance rather than focus on individual monthly numbers, given last year’s GST-related disruption and the shifting festive calendar. Q2FY27 and Q3FY27 results will also be important to assess whether volume growth is translating into operating leverage and margin expansion.

Supply-side execution will also matter, particularly for companies where demand is strong but capacity is constrained.

“First, investors should assess cumulative September–November retail performance rather than focus on individual months, given last year’s GST-related disruption and the shifting festive calendar. Second, Q2FY27 and Q3FY27 results will be important to gauge whether volume growth is translating into operating leverage and margin expansion. Third, supply-side execution will matter: companies with strong demand but constrained capacity may struggle to convert bookings into sales,” Gate said.

Valuations leave room for debate

The valuation picture offers another layer of complexity. Solanki said the recent correction has made auto valuations more reasonable, while Gate pointed to the sector’s valuation relative to its historical median.

“With about 10% correction recently, I believe the valuations are sitting at decent levels. Even comparing with 5-year and 10-year average PE the current valuations are lower than these levels. As far as market pricing is concerned, I think markets are factoring in some moderation in growth numbers due to the high base in H2FY27,” Solanki said.

Gate, however, noted that the Nifty Auto trades at around 31.1x trailing earnings, compared with its five-year median of 29.7x.

The key risks flagged by analysts include a weak rural recovery following the monsoon deficit, commodity and freight-cost inflation linked to geopolitical tensions, and inventory build-up if wholesale dispatches run ahead of retail sales. Solanki also flagged an uneven monsoon and an impending rate hike as uncertainties for growth momentum.

Analysts’ stock preferences

Analysts have different preferences within the auto space. Solanki prefers auto ancillaries over original equipment manufacturers (OEMs), naming Belrise Industries, Steel Strips & Wheels, Sansera Engineering and Gabriel India.

Among OEMs, Solanki prefers Maruti Suzuki in passenger vehicles and TVS Motor and Ather Energy in two-wheelers.

Gate’s preferred idea is Mahindra & Mahindra, with a BUY rating and a target price of Rs 4,150. At the stated CMP of Rs 3,035, that implies 36.8% upside.

“Mahindra & Mahindra remains our preferred idea in the auto space, with a BUY rating and a target price of Rs 4,150,” Gate said.

Gate’s view is supported by M&M’s SUV franchise, product pipeline and growth opportunities in electric SUVs, alongside its established position in light commercial vehicles. The company reported strong double-digit automotive growth in both July and August 2026, and Gate expects strong SUV and EV volumes, along with an improving commercial vehicle contribution, to support earnings.

The stock had corrected 12.6% over one month and 16.6% over one year as of September 24, according to the Choice analyst.

The key near-term trigger is M&M’s Q2FY27 results, scheduled for November 5, 2026, when investors will assess volume growth, margins and the contribution from its automotive businesses.

Disclosure: This article has been written by Kumar Gaurav, who is not a Sebi-registered Research Analyst or an Investment Adviser. Gaurav and their ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective Sebi-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here