Mutual funds rev up bets on automobile sector on GST cuts, festive tailwinds

Mutual funds are stepping up bets on the automobile sector as policy tailwinds and the September-October festive season brighten the outlook. The weight of auto stocks in mutual fund portfolios climbed to a 10-month high of 8.5% in August, up from 7.9% in June and 8% in July — the sharpest monthly rise among major sectors.

Allocations have moved above the BSE-200 benchmark weight of 8%, with PPFAS and HDFC each holding more than 11% in autos, according to a Motilal Oswal report. While many fund houses are ramping up exposure, most remain underweight or neutral. Buying in August was broad-based: Maruti Suzuki holdings rose 2.3% to 4.62 crore shares, Hero MotoCorp climbed 2.4% to 3.03 crore shares, and Bajaj Auto increased 2.4% to 1.91 crore shares. Mid-cap names also attracted interest, with Ashok Leyland jumping 4.4% to 44.82 crore shares and MRF inching up 4.1% to 0.03 crore shares.

The momentum follows a strong run for the Nifty Auto Index, which gained 28.7% in the past six months, and accelerated after the government cut GST on most vehicles — lowering levies from roughly 28% plus cess to 18%, while taxes on large SUVs were reduced to 40%. Two-wheelers up to 350cc now attract 18%, while premium bikes above that threshold face 40%. Brokerages expect the cuts to boost affordability and stimulate sales across premium and small cars.

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“Recent government measures such as tax cuts, lower interest rates that reduce loan EMIs, and GST cuts are positive steps aimed at stimulating consumer demand,” said Daylynn Pinto, Senior Fund Manager at Bandhan Mutual Fund. Pinto favours a mix of OEMs and ancillaries, especially those with strong replacement-market exposure or high technology barriers.

Vaibhav Shah, Auto Analyst at DSP Mutual Fund, expects the festive season to break the softness seen until August. “We expect the second half of the calendar year to be materially better,” he said, noting DSP’s higher exposure to entry-level cars, mid-level SUVs and premium motorcycles. He added that some portfolio trims reflected stock-specific factors rather than a weaker sector view.

Valuations remain diverse across the Nifty Auto index: Tata Motors looks inexpensive at 12x. Mahindra & Mahindra and Maruti Suzuki trade near 24x and 29x, after one-year gains of 31% and 30%, respectively. Pinto sees sector valuations as reasonable versus other consumer plays. Shah noted that auto ancillaries command higher multiples because of expected earnings growth, operating leverage and margin expansion, and added: “Given expectations of an upcycle, stronger volumes, and government-driven cost benefits, we expect valuations to remain at the higher end of their long-term averages. Sustained profitability would help these valuations hold beyond the initial festive season boost.”

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Looking ahead, managers said company-specific triggers and industry developments will guide further buying. Experts justify the auto premium on stronger earnings growth and better ROE/ROCE than the Nifty 50 — the Nifty 50 trades at a one-year forward P/E of 20x, while Nifty Auto commands a premium at 23.85x. Festive demand and GST benefits could act as immediate catalysts, with EPS upgrades for FY26–27 likely after second-quarter results, the managers added. Additional supports cited include pay commission hikes and income-tax cuts.

External risks remain limited in managers’ view. Pinto noted potential US tariffs are a concern but said Indian OEMs export little to the US, while ancillary exporters face some pressure; a favourable India–US trade deal could provide relief. Managers also highlighted niches such as SUVs and electric vehicles as incremental growth areas.

For investors seeking focused exposure, active auto-thematic funds include HDFC Transport & Logistics Fund, Bandhan Transportation & Logistics Fund and SBI Auto Opportunities Fund; sectoral index funds are offered by Nippon India, ICICI Prudential and Tata.

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