GST Cuts, Policy Tailwinds Set To Revive Auto Sector Demand, Says Motilal Oswal— Top Bets: Maruti Suzuki, M&M

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Motilal Oswal Report

The GST Council has provided a much-needed booster shot to the auto sector by reducing the tax rates on the majority of auto segments to 18% from 28% earlier, effective September 22, 2025. The GST rate on all SUVs above 4mtr (and other specifications) has been reduced to 40% without cess from an average of 43-50% earlier.

For tractor/tractor components, the rates have been cut to 5% from 12%/18% earlier. These timely rate cuts, coupled with other sectoral tailwinds like normal monsoon boosting rural sentiment, a ~100bp reduction in interest rates in CY25 so far and income tax benefits, are expected to revive demand for the auto sector from this festive season.

Further, while we expect the premiumization trend to continue, we also expect small car demand to grow over a very low base. We have now raised our FY26/FY27 volume growth estimates for two-wheeler to 4%/7.5% (vs 1%/5.7% earlier), passenger vehicles to 3%/8% (vs 2%/4% earlier), CVs to 5%/7% (vs 2%/4% earlier) and tractors to 10%/6% (vs 8%/5% earlier).

With a pick-up in demand, we also expect discounts to trend down across key segments, which should drive margin expansion going ahead. On the back of demand revival and much better earnings growth, we expect a re-rating for the sector.

Our top picks among auto OEMs are Maruti Suzuki (new launches and export ramp-up to drive 16% earnings growth) and M&M (new launches and positive rural sentiment to drive 20% earnings growth).

We also like Hyundai, Hero MotoCorp and Ashok Leyland.

We maintain our Sell on Eicher Motors. We have a Neutral rating on Tata Motors, Bajaj Auto and TVS.

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