Domestic auto sector is poised for strong growth, particularly in the two-wheeler (2W) and tractor segments. Over FY24-27 (estimated), these two segments are expected to outpace the broader industry with compound annual growth rates (CAGR) of 14 per cent and 10 per cent, respectively, according to Jefferies report.

This is in contrast to the relatively slower growth rates anticipated for passenger vehicles (PVs) at 7 per cent and trucks at 4 per cent.

India's two-wheeler demand, which lagged behind passenger vehicles during FY21-23 due to the impact of the COVID-19 pandemic and rising regulatory costs, is now experiencing a resurgence.

In FY24, 2Wheeler wholesales grew 14 per cent year-on-year (YoY), outperforming the 8 per cent growth seen in PVs. Despite this rebound, FY24 volumes for 2Ws are still 13 per cent lower than their FY19 peaks, while PV volumes are 25 per cent higher.

Looking ahead, 2Ws are projected to deliver an industry-leading 14 per cent CAGR over FY24-27, compared to 7 per cent for PVs and 4 per cent for trucks.

Tractors are another bright spot in the auto sector, with the industry expected to enter a strong cyclical recovery. Tractor volumes are anticipated to grow by 6 per cent in FY25, followed by a 12 per cent CAGR in FY26-27, supported by strong rural demand and favourable agricultural conditions.

The electric vehicle (EV) revolution is gradually making its way into the Indian 2W market, with EVs' share in 2W sales rising from just 0.4 per cent in FY21 to 5 per cent by the first quarter of CY23.While government subsidies and new launches have driven this growth, recent reductions in incentives for electric two-wheelers (E2Ws) have slowed momentum, keeping the share of E2Ws in the 4-7 per cent range over the last two years.

However, the EV market is expected to grow steadily, with the share of EVs in 2W sales projected to reach 7 per cent in FY25, 10 per cent in FY26, and 13 per cent in FY27.In the passenger vehicle segment, EV adoption has been slower, with EVs accounting for only around 2 per cent of total sales.

The auto sector faced margin pressure over FY21-23 due to weak demand and a sharp rise in metal prices. Steel, aluminum, and precious metal prices surged between mid-2020 and April 2022, weighing on auto original equipment manufacturers (OEMs).However, metal prices have since moderated, and while a further rise in prices is possible, it is unlikely to match the intensity of the previous rally.

EBITDA margins for most covered auto OEMs expanded by 1-4 percentage points YoY in FY24, and margins are expected to improve by an additional 40-210 basis points (bp) over FY24-27, driven by recovering demand, stable input costs, and operating leverage. (ANI)

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