The Indian automotive sector is finally flashing green! After a protracted period of sluggish performance, spanning five consecutive quarters, leading Indian automakers are poised to deliver a double-digit profit growth in the second quarter of the fiscal year (Q2 FY2025-26). This resurgence is a significant turning point, injecting much-needed optimism into an industry that has long been a bellwether for the wider Indian economy.
Brokerage houses and industry analysts are forecasting a substantial recovery, predicting a robust 10-17% rise in revenue and a profit growth figure that comfortably sits in the mid-teens—around 15% year-on-year. This anticipated financial uplift is primarily being powered by a strong demand revival in key segments, coupled with strategic policy interventions and a benign operating environment.
The Engine of Growth: Two-Wheelers and Tractors Lead the Charge
The core of this impending profit surge lies in the extraordinary performance of the Two-Wheeler (2W) and Tractor segments. These segments, which are deeply intertwined with the health of the rural economy, have seen a powerful resurgence.
Two-Wheeler Segment: A Festive and Export Windfall
The 2W segment has emerged as a star performer, showing remarkable resilience and growth.
- Robust Volume Growth: The segment posted a notable sales growth, with the Society of Indian Automobile Manufacturers (SIAM) data indicating a 7.4% growth in Q2, selling 5.56 million units. This strong volume performance, particularly towards the end of the quarter, is a direct result of improved consumer sentiment, a pickup in urban and semi-urban mobility, and the beginning of the festive buying spree.
- The Scooter Surge: Within the 2W category, the scooter sub-segment has been a major driver, registering a growth of 12.4%. This trend is indicative of increasing female participation in the workforce and a preference for easier, automatic urban mobility options.
- Export Strength: Adding to the domestic cheer, 2W exports hit an all-time high of 1.3 million units, marking a 25% year-on-year surge. This export momentum provides a crucial hedge against domestic market volatility and capitalizes on favorable global demand and foreign exchange movements. Key players like Bajaj Auto and TVS Motor are expected to be the prime beneficiaries of this export and volume upturn.
Tractor Segment: The Rural Revival Story
The rural economy, buoyed by positive agricultural prospects, has provided a major lift to the tractor segment. Analysts from brokerages like Nomura and Motilal Oswal anticipate that tractor volumes will “beat estimates” for the quarter. This performance is largely attributed to:
- Positive Monsoon: A good monsoon season leads to higher agricultural output and, consequently, higher farm income. This directly translates into increased purchasing power for farmers, driving demand for agricultural machinery like tractors.
- Improved Rural Sentiment: Government support programs and higher minimum support prices (MSPs) for Kharif crops have further enhanced farmer sentiment, spurring discretionary spending on capital goods.
Policy Tailwinds and Operating Leverage: Fueling Profitability
Beyond mere sales volumes, the anticipated double-digit profit growth is strongly supported by a combination of government policy changes and internal company efficiencies.
The GST 2.0 Effect
A landmark decision by the government to rationalise Goods and Services Tax (GST) rates, referred to by industry leaders as ‘GST 2.0,’ has provided a significant stimulus. The reduction in effective tax rates on smaller vehicles and two-wheelers, which came into effect towards the end of Q2, has made vehicles more affordable, immediately boosting retail sales and bookings. While the full impact is expected to be visible in the December quarter (Q3), the anticipation and late-quarter sales surge played a key role in clearing inventories and setting a positive foundation.
Cost Management and Operating Leverage
Automakers have been aggressively focusing on cost rationalisation and optimising supply chains over the past year.
- Benign Input Costs: Although some precious metals and aluminium saw price hikes, the quarter saw a sharp decline in key input costs like rubber, steel, and lead. This mixed-material cost trend, overall, is expected to ease margin pressures for original equipment manufacturers (OEMs) and auto component players.
- Operational Efficiency: Higher production volumes, driven by increased demand, naturally lead to better operating leverage. This means that the fixed costs are spread over a larger sales base, directly translating into fatter profit margins for the companies.
The Passenger Vehicle Conundrum: A Mixed Bag
While the overall sector narrative is bullish, the Passenger Vehicle (PV) segment presents a more nuanced picture.
- Subdued Volume Growth: SIAM data indicates that PV sales, though improving towards the quarter’s close, still registered a marginal de-growth of 1.5% in the July-September period (Q2), standing at 1.04 million units. This segment faced a temporary disruption due to the GST rate rationalisation, as customers postponed purchases expecting lower prices.
- SUV Dominance and Hatchback Revival: The market continues to be dominated by Utility Vehicles (UVs), which account for about two-thirds of all PV sales. However, a significant development in September was the meaningful revival in demand for entry-level hatchbacks, a segment that had been struggling for a long time. This is a crucial indicator of improving sentiment among budget-conscious buyers.
- Supply Challenges: Market leader Maruti Suzuki is expected to face some minor margin pressure due to increased customer discounts and new model launch expenses. Furthermore, lingering supply chain bottlenecks and component shortages continue to put a cap on the maximum potential sales volume for the PV segment.
- Export Bright Spot: Similar to 2Ws, the PV segment saw its highest-ever quarterly exports of 2.42 lakh units, registering a substantial 23% growth. This global demand is offsetting some of the domestic sluggishness.
Commercial Vehicles and the Road Ahead
The Commercial Vehicle (CV) segment maintained its positive momentum, posting an 8.3% growth in sales. This is a direct consequence of sustained activity in infrastructure development and a healthy appetite for new vehicles among fleet operators. The CV segment’s growth is often seen as a reliable indicator of broader economic activity, and its steady rise suggests a firming economic foundation.
Outlook for H2 FY26
The consensus is that the second half of the fiscal year (H2 FY26) will be even stronger. The auto industry enters this period with:
- Peak Festive Demand: The core festive and wedding season, running through Q3, is expected to deliver the highest-ever sales figures.
- Full Impact of GST Cuts: The lower tax rates will fully percolate into the market, enhancing affordability.
- Positive Macro-Indicators: Stable interest rates, recovering rural income, and sustained infrastructure spending will continue to fuel demand.
In conclusion, after navigating a prolonged slowdown, the Indian auto sector’s projected double-digit profit growth for Q2 is a definitive signal of a strong cyclical upturn. While the PV segment faces minor near-term hurdles, the explosive growth in two-wheelers and tractors, buttressed by policy support and cost efficiencies, has set the industry on a clear road to recovery and sustained expansion. The Indian auto engine has successfully rebooted.
