Elara Securities in its fresh note on automobile sector maintained 'Buy' rating on Maruti Suzuki India Ltd (MSIL), Mahindra & Mahindra Ltd and Eicher Motors Ltd. It retained 'Accumulate' on Tata Motors Ltd, Bajaj Auto Ltd, TVS Motor Company Ltd and Hero MotoCorp Ltd (HMCL). Tata Motors Passenger Vehicles Ltd (Tata Motors PV) and Ashok Leyland are two 'Reduce' calls, the domestic brokerage said while suggesting up to 42 per cent potential upsides for auto stock.  The targets came at a time petrol and diesel prices were hiked for the fourth time in 10 days, raising concerns over the likely impact of auto fuel price hikes on auto sales.  

Elara said the risk-reward is favorable for passenger vehicle and two-wheeler firms, as even if there is a downcycle, the decline has been moderate. After factoring in a mid-single digit volume decline in the bear case, it said the likely stock price downside is only 10-20 per cent while, in the base and bull cases, upside is in the range of 20-80 per cent. 

"For CV, our bear case scenario assumes a 15 per cent volume decline in FY28E, and, hence, remains a high-risk-high reward segment (bear case stock price downside of 30-40 per cent). We revise our Ashok Leyland target to Rs 160 from Rs 171 after factoring in the current commodity scenario. Our
top picks remain Eicher Motors, TVS Motor, Maruti Suzuki, and M&M," Elara said.

Petrol, diesel price hikes: Should investors worry?
Elara said one of the concerns of auto investors has been that after strong H2FY26 growth of the auto sector in the range of 15-20 per cent post GST cut, can the current rise in fuel cost and price increases due to commodities trigger off a downcycle in the sector. 

"Although fuel price movements have historically shown a weak direct correlation with volume growth (roughly 0.2-0.3 times), the sector’s cycle is driven by a combination of factors that shape consumer sentiment — fuel & product price inflation, interest rates, rainfall patterns, and total cost of ownership (TCO) dynamics. The resulting cyclicality differs across 2W, PV and CV – reflecting each segment’s sensitivity to these drivers," Elara said.

What historical trends suggest?
The brokerage drew parallels between the downcycle of H2FY19-FY20 in autos -- which was marked by pre-Covid and pre-BS VI price increase; and events that led to the decline in retails in FY20 (pre-COVID). 

"During FY18-H1FY19, consumer sentiments and volume growth were buoyant, which were then hampered by sharp price hikes from insurance cost, the NBFC crisis, fuel price increases and ABS/CBS cost increases dampening sentiments and lifting TCO 4 per cent for PV & 6 per cent for 2W during March 2018 to March 2019, with retail demand declining 6 epr cent for PV and 2W and 15 per cent for CV in FY20," Elara said.

The brokerage believes despite the challenges currently, the scenario is much better than the situation during FY19-20 and, hence, it doe snot believe that slowdown like H2FY19-FY20 is likely. 

Bear case scenarios
Elara said it still evaluated the bear case scenario for OEM if at all such declines were to play out. 

In a base case scenario, it expect a PV growth CAGR of 6 per cent, a two-wheeler CAGR of 7 per cent, a MHCV CAGR of 3 per cent, a LCV CAGR of 5 per cent and a tractor CAGR of 1 per cent during FY26-28E. 

"In a bear case scenario, we expect a PV CAGR decline of 3 per cent, a 2W CAGR decline of 3 per cent, a MHCV/LCV CAGR decline of 8 per cent and a tractor CAGR decline of 10 per cent during the same period. Separately, note that in the near term the comments of the PM have had a negative impact on consumer sentiment as per our dealer interactions," it said.     

Target prices for auto stocks
Elara suggested targets of Rs 16,546 on MSIL, 4,367 on M&M, Rs 12,020 on Bajaj Auto, Rs 9,001 on Eicher Motors, and Rs 4,173 on TVS Motor. It sets target of Rs 423 on Tata Motors, Rs 354 on Tata Motors PV and Rs 5,800 on HMCL.