Auto stocks are surging—even as sales sputter and supply risks rise

Mint

14 hours ago

Mumbai: India's auto and auto ancillary stocks are on a tear—even as sales sputter and supply chain clouds gather.
Some lesser-known auto component makers have posted triple-digit stock market gains in the past three months, eclipsing marquee vehicle manufacturers and defying a cautious outlook for the industry.
Shares of Frontier Springs have soared 151%, Lumax Auto Technologies is up 110%, and Kinetic Engineering has gained 90%, outpacing commercial vehicle makers Force Motors's 85% and SML Isuzu's 78% gains.
One of the key drivers behind the rally, analysts say, is liquidity. Flush markets and improved risk appetite have lifted not just autos, but other sectors as well. Hopes of a festive season demand rebound, coupled with a potential trickle-down from banks following the Reserve Bank of India's 50-basis-point rate cut, have added to the optimism.
Still, it hasn't been a smooth ride for all auto and auto ancillary stocks.
Containe Technologies (-28%), Ola Electric (-23%), Atul Auto (-9%), GNA Axles (-11%), and JBM Auto (-9%) have seen corrections over the past three months, while the Nifty Auto index has risen 7.2%.
Hyundai Motor India fared better with 26% gains in the past three months, followed by Mahindra and Mahindra (17%), TVS Motor Co. (4%), Bajaj Auto (2%), and Maruti Suzuki India (6%).
Some market participants caution that if the expected rate cut transmission to borrowers or retail loan growth fails to play out, auto stocks could be in for a sharp pullback.
The current surge is drawing attention because it runs counter to the broader outlook: domestic vehicle demand remains muted, supply chain risks from a rare-earth-magnet shortage are mounting, and analysts warn of earnings pressure in the September quarter if the disruption persists.
While some investors see the issue as temporary, others worry the rally may be running ahead of fundamentals.
A 15 July report by BNP Paribas showed mutual funds slightly trimmed their overweight position in the auto sector—to 7.7% in June from 8.0% in May.
Foreign institutional investor exposure dipped to 6.9% from 7.0% in the same period—but market experts explained that this doesn't necessarily mean FIIs exited auto stocks, and could reflect allocations to other sectors instead.
Foreign portfolio investors, meanwhile, pumped in $553 million in auto stocks in June, up from just $11 million in May, according to NSDL data. FPIs were net sellers in the auto sector for nine straight months, from August 2024 through April 2025.
Supply chain concerns
Rare earth magnet supply remains a key concern. These magnets—critical for both electric vehicles (EV) and internal combustion drivetrain components—are used in electric motors, oxygen sensors, lasers, and a wide array of industrial and medical applications.
China dominates this supply chain, and its recent decision to restrict exports of certain rare earth materials has raised alarm across global auto markets.
In June, Maruti Suzuki and Bajaj Auto said they had sufficient magnet inventory through July. Kumar Rakesh, analyst at BNP Paribas, said there is no immediate earnings risk from the rare earth crisis, as most companies are believed to have sufficient inventory through July.
'Investors largely expect the issue to be resolved by then," he said, adding that if new model launches get delayed, that could be a warning sign.
But concerns persist. On 11 June, Reuters reported that Maruti had slashed near-term production targets for its debut EV, the e-Vitara, by two-thirds due to magnet shortages.
Rakesh added that the pressure may not be limited to EVs. 'Even ICE vehicles could feel some pressure," he said, referring to conventional vehicles run on internal combustion engines.
Companies are already exploring alternative sourcing options and diversifying supply chains, Rakesh added. 'For now, it looks more like a short-term disruption than a long-term threat."
Sourcing under scrutiny
In an earnings call on 30 April, Vivek Vikram Singh, managing director and group chief executive of SONA BLW Precision Forgings, flagged near-term supply chain risks.
'In India, while we are working with the industry and the government and the Chinese embassy to speed up the process of importing magnets from China, we're also evaluating alternate materials, including Ferrite, different grades of magnets, different technologies, as well as different supply sources," he said.
Singh warned the disruption could hit global auto production in the short term.
'The threat of a rare earth minerals shortage is real, and the impact could be visible in the near term, especially for EVs," said Rajat Chandak, senior fund manager at ICICI Prudential Mutual Fund.
He added that alternate sourcing arrangements are being explored, but scaling them will require government support. 'One option available to OEMs (original equipment manufacturers) is to import the entire motor, rather than just the magnets or rare earth minerals," he said.
TVS Motor Co., for a second month in a row, flagged a similar concern in its June update, noting that 'magnet availability remains a challenge in the short to medium term". Its EV sales dropped to 14,400 units in June from 27,976 in May.
Demand remains sluggish
Soft domestic demand is adding to the auto sector's complexity.
Growth in FY26 is expected to remain in low single digits across most auto segments, said Arun Agarwal, vice president–fundamental research, at Kotak Securities. Tractors may hold up slightly better than passenger vehicles, but overall momentum is weak, he said.
Sales data for the April-June quarter released by the Society of Indian Automobile Manufacturers (Siam) earlier this month showed mixed trends.
Passenger vehicle sales crossed the 1 million mark, reaching 1.01 million units, but due to weaker sales toward the end of the quarter volumes declined 1.4% year-on-year.
Two-wheeler sales fell 6.2% to 4.67 million units, largely due to inventory corrections across the industry. Three-wheeler sales in the financial first quarter hit a record 165,000 units, up 0.1% year-on-year, driven by the passenger carrier segment. Commercial vehicle sales declined marginally by 0.6% to 223,000 units.
'Looking ahead to Q2, the overall industry outlook remains cautiously optimistic," Siam said.
While challenges may persist in the near term, a few positive indicators could support a recovery: the upcoming festive season may lift demand for passenger vehicles and two-wheelers; above-normal monsoons could boost rural income and entry-level vehicle sales; and the Reserve Bank of India's 100-basis-point (bps) rate cuts this year could eventually improve affordability and consumer sentiment.
'However, the supply-side challenges—especially the recent export licensing requirement from China on rare earth magnets—have been a concern for OEMs of all categories," Siam said.
Agarwal cautioned that prolonged softness could force automakers to resort to discounting, putting margins under pressure. 'Low volumes hurt operating leverage, putting further pressure on profitability," he said.
Earnings on watch
Kotak Institutional Equities expects auto companies it covers to report 1% revenue growth for the first quarter, supported by mid-single-digit growth in vehicles and price realization gains, partly offset by deeper discounts and weak global sales.
'We expect Ebitda margins to decline by 210 bps (year-on-year), driven by higher discounts, commodity headwinds (tires), higher advertisement spends and tariff-related hits," the brokerage said in a 2 July report.
For auto ancillary companies, the revenue outlook appears slightly stronger. Kotak expects 6.6% year-on-year revenue growth in the first quarter, driven by low- to mid-single-digit growth in vehicles and mid- to high-single-digit gains in replacement segments like tyres and bearings. Tractor-linked volumes are expected to rise in the low teens.
However, even ancillaries aren't immune to pressures. Kotak expects Ebitda margins to decline 60 basis points year-on-year due to weaker product mix (batteries), raw material headwinds (tires), and a weaker export mix.
The brokerage added that companies with exposure to the global auto market are likely to report weak numbers, given decline in production volumes, especially in the US.
Auto makers will begin reporting their June-quarter earnings on 23 July, with Force Motors scheduled to announce first. Investors will be watching closely to see whether earnings justify the recent stock gains—or reveal signs of overreach.