Mutual funds betting big on auto sector amid GST cuts
What's the story
Mutual funds are increasing their investments in the automobile sector, driven by favorable policy changes and the upcoming festive season. The weight of auto stocks in mutual fund portfolios hit a 10-month high of 8.5% in August, up from 7.9% in June and 8% in July, according to a report by Motilal Oswal. This is the highest monthly increase among major sectors during this period.
Portfolio adjustments
Major fund houses exceed BSE-200 benchmark weight
The allocation of auto stocks in mutual fund portfolios has surpassed the BSE-200 benchmark weight of 8%. PPFAS and HDFC have each allocated over 11% to autos, the report added. The broad-based buying in August saw major companies like Maruti Suzuki increase their holdings by 2.3%, Hero MotoCorp by 2.4%, Bajaj Auto by 2.4%, Ashok Leyland by 4.4%, and MRF by 4.1%.
Market trends
Nifty Auto index's stellar performance, government GST cuts
The Nifty Auto Index's stellar performance, gaining 28.7% in the last six months, has also contributed to this trend. The government's recent GST cuts on most vehicles have further fueled investor interest. The tax cuts have reduced levies from around 28% plus cess to 18%, with large SUVs now taxed at a lower rate of 40%.
Sales forecast
Analysts expect GST cuts to boost vehicle sales
Analysts expect the GST cuts to make vehicles more affordable and boost sales across premium and small cars. Daylynn Pinto, Senior Fund Manager at Bandhan Mutual Fund, said these government measures are aimed at stimulating consumer demand. Vaibhav Shah, Auto Analyst at DSP Mutual Fund, also expects the festive season to improve market conditions after a soft period until August.
Valuation analysis
Fund managers see reasonable sector valuations
Valuations vary across the Nifty Auto index, with Tata Motors looking cheap at 12x. Mahindra & Mahindra and Maruti Suzuki trade near 24x and 29x, respectively, after one-year gains of 31% and 30%. Pinto sees sector valuations as reasonable compared to other consumer plays, while Shah noted auto ancillaries command higher multiples due to expected earnings growth and margin expansion.
Future outlook
EPS upgrades expected for FY26-27 after Q2 results
Looking ahead, fund managers said company-specific triggers and industry developments will guide further buying. They expect EPS upgrades for FY26-27 after second-quarter results, with additional supports being pay commission hikes and income-tax cuts. Despite potential US tariffs, Pinto said Indian OEMs export little to the US, while ancillary exporters face some pressure; a favorable India-US trade deal could provide relief.