Valuation a key hurdle for auto stocks in short term

Analysts bullish on the sector for long term due to GST cut and other tailwinds

- NIKITA VASHISHT

Multiple tailwinds for the automobile sector, including a cut in goods and services tax (GST) rates, are keeping analysts bullish on auto stocks from a long-term perspective, even as they see the rally running its course in the near term.

Autostocks, they point out, have rallied 7-18 per cent since Prime Minister Narendra Modi announced that the government would roll out “Next-Gen” GST reforms before Diwali 2025, stretching valuations into slightly uncomfortable zones.

“Indian auto stocks have outperformed the benchmark Nifty 50 meaningfully since August 1s in anticipation of acceleration in demand due to the GST rationalisation. Current valuations, even after our EPS (earnings per share) estimate increases, are punchy and higher than long-term average,” said HSBC analysts, who expect the scrips to remain rangebound in the near term.

The Nifty Auto index has outperformed the benchmarks and other sectoral indices over the past six months (till September 15).