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Electric vehicles get all the headlines. Auto stocks tell a quieter story. Despite the EV optimism, we’ve stayed underweight auto for some time. Here’s the reasoning, and what would change our mind.
The EV hype vs core volumes
EVs grew rapidly in percentage terms because the base was tiny. In absolute volumes, ICE (internal combustion engine) cars still dominate. The transition is happening but slowly.
Where EVs have grown fastest is in two-wheelers. Bajaj, Hero, TVS have all launched electric scooters. Volumes are scaling. The economics for two-wheeler EVs are clean, with lower upfront cost relative to ICE and good charging infrastructure.
For passenger vehicles, EV penetration in India is still in single digits. The infrastructure remains thin outside major cities. Consumer hesitation about resale value, charging time, and range continues. The hype on PV EVs is running ahead of actual market behavior.
What tariffs are actually doing
US tariff actions in 2025 have hit Indian auto exports unevenly. Components face higher tariffs. Some passenger vehicle exports have slowed. The tariff regime adds uncertainty to capital allocation decisions for Indian automakers.
For domestic-focused players (Maruti, Tata, Mahindra in PV), this matters less. For component makers and exporters (Bharat Forge, Sundaram Fasteners), it matters more.
The automotive supply chain is global, and Indian companies are net exporters of components. Tariff disruption hurts.
Margin compression in passenger vehicles
The PV market has become more competitive, not less. New launches from Tata, Mahindra, MG, Hyundai, Kia, and now Chinese OEMs have created discounting pressure. Maruti has responded with model refreshes but at the cost of margins.
Industry-wide PV operating margins have compressed. The sector that was a dominant compounder in the 2010s now grinds out single-digit revenue growth with single-digit margin pressure.
Two-wheelers: the brighter pocket
Two-wheeler dynamics are healthier. Rural recovery has supported volumes. Premium segments (above 350cc, electric scooters) have grown faster than the base. Bajaj, Eicher, TVS have all delivered better revenue and margin growth than PV makers.
If you want auto exposure, two-wheelers are where the cleaner story is. The structural setup of mass mobility plus aspirational premium plus electric transition is more favorable than passenger cars.
What we’d need to see to flip
Three things would shift our view from underweight to neutral or positive on auto.
Sustained PV volume growth above 8 to 10% annually. Currently growth is in mid-single digits at best.
Margin recovery in PV makers. Either through pricing discipline (unlikely given competition) or through cost reductions in EV components as scale builds.
Resolution of tariff uncertainty. Either tariffs ease or companies adapt their supply chains in ways that restore export economics.
Until at least two of these play out, auto stocks face structural headwinds that the EV narrative doesn’t compensate for at current valuations.
Where auto could surprise positively.
The premium PV segment has held up better than the mass segment. Brands like BMW, Mercedes, and the higher-trim variants from mainstream players have grown. If you want PV exposure, it’s through this end of the market.
Tata Motors has multiple narratives running. JLR. PV India. Commercial vehicles. EVs through Tata Passenger Electric Mobility. The complexity is also the attraction. If JLR continues to deliver, the SOTP math becomes interesting.
Mahindra has executed well in SUVs and is positioned in tractors and commercial. Multi-engine portfolio with good execution.
Both could outperform the sector even if the sector is flat.
Position sizing from here.
For most HENRYs, auto exposure of 3 to 5% is sufficient. Two-thirds in two-wheelers and one-third in selective PV (Tata Motors or Mahindra primarily) is a reasonable structure.
Don’t overweight auto on the EV theme alone. The theme is real but slower than the narrative. The portfolio impact of being early is years of underperformance while waiting for the story to deliver.
The honest conclusion.
We’re not bearish on Indian auto long-term. We’re skeptical that current valuations adequately reflect the headwinds. That’s a different position. We’d buy more on weakness. We won’t chase the EV narrative at current prices.
When the math gets compelling, we’ll change our minds. Until then, neutral to underweight feels right.
