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Auto Sector Top Picks: The domestic automobile sector is witnessing a clear divergence in outlook, with analysts maintaining a strong structural preference for two-wheelers (2Ws) and commercial vehicles (CVs) over passenger vehicles (PVs).
According to a report by Brokerage firm Emkay, growth in 2Ws and medium and heavy commercial vehicles (MHCVs) is underpinned by a durable replacement-led demand cycle, indicating a meaningful runway ahead. This is complemented by stronger pricing flexibility, which was also evident during the Covid phase.
The competitive landscape also lends support to this view. The 2W and MHCV segments are characterised by a structurally stable industry with limited new-entrant risk. Furthermore, the electric two-wheeler (E-2W) industry structure has largely stabilised with consolidation among incumbents and Ather, along with a low probability of new entrants.
Demand Visibility and Pricing Flexibility
The growth outlook for 2Ws and CVs is supported by replacement-led demand, Emkay said.
Demand for two-wheelers (2Ws) and commercial vehicles (CVs) is mainly driven by people replacing older vehicles, which supports steady growth. By FY26, 2W and MHCV volumes are expected to be 4 per cent and 9 per cent higher than their FY19 levels, compared with much stronger growth of 40 per cent and 46 per cent for passenger vehicles (PVs) and tractors.
This means 2Ws and MHCVs have grown slowly, at about 1 per cent annually, while PVs and tractors grew faster at 5 to 6 per cent.
However, 2W and CV manufacturers have a better ability to increase prices. During Covid, their margins fell only slightly, unlike PV makers, and price hikes from April 2026 aim to offset rising commodity costs.
Industry Comparison: 2Ws, CVs, and PVs
| Metric | 2Ws | MHCVs | PVs | Tractors |
| FY19–FY26E Volume CAGR | 4% | 9% | 40% | 46% |
| FY19–FY26E Volume CAGR | ~1% | ~1% | 5–6% | 5–6% |
| Gross Margin Impact (Q2FY21–Q1FY23) | Up to -150 bps | – | -5 pps (MSIL) | -10 pps (M&M) |
(Source: Emkay)
Two-wheelers and MHCVs show modest volume growth but stronger margin resilience, while passenger vehicles and tractors demonstrate higher growth yet face greater margin pressure, indicating better stability in 2Ws and CVs.
Passenger vehicles face competitive headwinds
Despite healthy near-term demand, the PV industry faces a more challenging setup. Industry Vahan retail sales increased 16 per cent year-on-year in Q4FY26.
However, several factors are expected to weigh on margins, including relatively low pricing flexibility amid a sharp commodity uptick and the need for a potential 3.5 per cent price hike to offset higher raw material costs.
Additional headwinds include a lack of new model launches, historically a key industry growth driver, and rising competitive intensity due to new entrants such as JSW and launches by OEMs like Renault. Within the PV segment, M&M is preferred among peers given its better earnings visibility.
Bottom Line
From an overall perspective, the domestic automobile sector shows a clear preference for two-wheelers (2Ws) and commercial vehicles (CVs) over passenger vehicles (PVs), supported by replacement-led demand, stronger pricing flexibility, and a stable competitive landscape.
While 2Ws and MHCVs have witnessed modest volume growth since FY19, their ability to maintain margins and pass on rising commodity costs enhances their stability.
In contrast, PVs face margin pressures due to lower pricing power, limited new model launches, and increasing competition despite healthy near-term demand. Among OEMs, Ather Energy, TVS Motor, Eicher Motors, and Ashok Leyland emerge as key investment picks, with Mahindra & Mahindra preferred within the PV segment.
(Disclaimer: This article is automated and reviewed by users. It is intended for informational purposes only and should not be taken as investment advice. Please consult your financial advisor before making any investment decisions.)
