The reduction in Goods and Services Tax rates on automobiles has triggered a strong rally across several automobile and auto-component stocks, supported by expectations of higher demand, improved margins, faster replacement cycles and a broader valuation re-rating.
Sona BLW Precision Forgings emerged as the best-performing stock among the companies tracked, gaining more than 77%. Samvardhana Motherson International and Bharat Forge followed closely, advancing approximately 74% and 68%, respectively.
The rally comes after Prime Minister Narendra Modi announced the government’s plan to introduce next-generation GST reforms during his Independence Day address on August 15, 2025. The revised GST rates applicable to the automobile sector subsequently came into effect on September 22, 2025.
Market experts, however, cautioned that share prices of several automobile companies have risen considerably faster than their projected earnings, leaving limited scope for further valuation expansion unless sales volumes and profitability improve meaningfully.
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Auto and Ancillary Stocks Record Strong Gains
Among major automobile manufacturers, Bajaj Auto climbed 45.13%, while TVS Motor Company advanced 39.06%. Commercial vehicle manufacturer Ashok Leyland gained 38.86%, and Eicher Motors rose 33.41%.
Auto-component and battery manufacturers also participated in the rally. Bosch gained 21.81%, Exide Industries advanced 12.97%, Hero MotoCorp rose 12.75%, and UNO Minda increased 10.37%.
Not every automobile stock benefited from the sector-wide optimism. Mahindra & Mahindra declined 3.53%, Maruti Suzuki India slipped 0.61%, and Tube Investments of India fell 10.71% during the period under review.
Tata Motors’ Combined Market Capitalisation Rises 16%
Tata Motors recorded an approximately 16% increase in combined market capitalisation following the company’s demerger.
The aggregate market value of Tata Motors’ passenger vehicle and commercial vehicle businesses increased from ₹2,44,686.47 crore to ₹2,84,439.32 crore. This represented an addition of nearly ₹39,753 crore in market capitalisation.
The demerger has allowed investors to evaluate the passenger vehicle and commercial vehicle businesses separately, based on their respective demand cycles, growth prospects and profitability.
Rally Has Outpaced Earnings Growth: Analyst
Subhash Gate, Senior Research Associate for Auto and Auto Ancillaries at Choice Institutional Equities, observed that the rally in Bajaj Auto, TVS Motor and Ashok Leyland has moved ahead of their projected earnings performance.
Choice Institutional Equities has assigned an “ADD” rating to Bajaj Auto with a target price of ₹11,700, an “ADD” rating to TVS Motor with a target price of ₹4,250, and a “BUY” rating to Ashok Leyland with a target price of ₹195.
The three companies are expected to report an earnings-per-share compound annual growth rate of approximately 12% to 21% between FY26 and FY29. Their share prices, however, have already risen by around 40% to 45%.
According to Gate, prevailing market valuations appear to have factored in nearly two to three years of anticipated earnings growth. Consequently, the next phase of the rally may depend on whether corporate earnings catch up with the expectations already built into stock prices.
TVS Motor’s Re-Rating Supported by Earnings and ROCE
Of the three automobile companies under coverage, TVS Motor appears to have the strongest fundamental support for its valuation re-rating.
The company is projected to deliver an EPS CAGR of approximately 21% between FY26 and FY29. Its return on capital employed is estimated at around 40% for FY26, the highest among the three companies.
TVS Motor’s share price increased from ₹3,020.30 on August 14, 2025, to ₹4,200 on September 3, 2026, generating a return of 39.06%.
Gate indicated that the company’s comparatively stronger earnings growth and capital efficiency make its valuation re-rating more sustainable than that of its peers. Nevertheless, continued sales momentum and margin delivery will remain important for supporting the higher valuation.
Ashok Leyland Rally Driven Largely by Valuation Expansion
Ashok Leyland’s share price rose from ₹121.96 to ₹169.35 during the period under consideration, producing a return of 38.86%.
The company is expected to report an EPS CAGR of about 12% between FY26 and FY29. Its market price-to-earnings-growth ratio, or Market PEG, stands at approximately 2.1 times, compared with an implied PEG of around 1.7 times.
These figures suggest that optimism surrounding the commercial vehicle cycle has moved slightly ahead of the company’s projected earnings growth.
The future performance of the stock is likely to depend on the strength of commercial vehicle demand, replacement purchases, fleet modernisation and the company’s ability to translate volume growth into higher margins.
Bajaj Auto Appears Most Stretched on Growth-Adjusted Valuation
Bajaj Auto recorded the strongest gain among the three automobile manufacturers covered by Choice Institutional Equities.
Its share price increased from ₹8,213.50 on August 14, 2025, to ₹11,920 on September 3, 2026, reflecting a return of 45.13%.
However, the company also showed the widest gap between its market PEG and implied PEG. Bajaj Auto’s Market PEG stood at approximately 2.3 times, compared with an implied PEG of 1.8 times.
This makes Bajaj Auto the most stretched of the three stocks when its valuation is assessed against projected growth. Future upside may therefore require stronger-than-expected demand, exports, margins or earnings performance.
GST Reduction Improves Demand for Two-Wheelers and Affordable Cars
Rahul Sharma, Head of Research at Equity99, attributed the rally in auto-component stocks to a valuation re-rating initiated by the GST rate reduction. Margin expansion and an acceleration in vehicle replacement cycles also contributed to the upward movement.
While volume growth across the auto-ancillary sector has remained uneven, the GST reduction has supported demand for two-wheelers and affordable passenger vehicles. Higher vehicle sales have, in turn, increased demand for components supplied by ancillary manufacturers.
Lower effective taxation can reduce the acquisition cost of vehicles, making entry-level cars and two-wheelers more accessible to consumers. The benefit is particularly significant in price-sensitive market segments, where even a limited reduction in the final purchase price can influence buying decisions.
Ancillary companies may also benefit from rising production schedules, inventory replenishment and higher demand for replacement components.
EV Components and Fleet Modernisation Could Drive Next Growth Phase
The next phase of growth for automobile component manufacturers is expected to come from the increasing value of electric vehicle components and replacement demand in the medium and heavy commercial vehicle segment.
As electric vehicles require different powertrain, electronic and technological systems, component manufacturers with exposure to EV platforms may benefit from rising content per vehicle.
Fleet modernisation is another potential growth driver. Replacement of ageing medium and heavy commercial vehicles could create demand for both new vehicles and the components used in their production.
Sharma identified Samvardhana Motherson International as a preferred stock in the current environment, citing its diversification into non-automotive businesses, including aerospace, and its efforts to reduce debt.
The company’s share price increased from ₹93.10 to ₹162, delivering a return of 74.01%. Its diversification strategy and improving balance sheet are expected to provide better earnings visibility and reduce dependence on conventional automobile demand.
Sona BLW Leads Rally With 77% Gain
Sona BLW Precision Forgings registered the highest return among the stocks tracked, gaining 77.05%.
The company’s exposure to electric vehicle components and advanced automotive systems appears to have strengthened investor expectations regarding its long-term growth prospects.
Bharat Forge also delivered a substantial return of 67.81%, benefiting from positive sentiment around automobile demand, commercial vehicle replacement, exports and diversification into other engineering and manufacturing segments.
The sizeable gains in these stocks indicate that investors are not merely pricing in a temporary increase in vehicle sales but are also assigning higher valuations to companies exposed to structural themes such as electrification, premiumisation, exports and fleet renewal.
Further Gains Depend on Festive Demand and Margin Improvement
Despite the favourable outlook, analysts cautioned that further re-rating may be difficult unless the improvement in sentiment is followed by measurable earnings growth.
The key test will be whether demand generated by the GST reduction translates into sustained retail sales during the festive season. Investors will also monitor dealer inventories, rural demand, financing conditions, commodity costs and operating margins.
If stronger volumes are accompanied by margin expansion, current valuations may receive earnings support. However, if sales growth remains uneven or profitability fails to improve, stocks that have already recorded steep gains could face consolidation.
The automobile sector’s next move will therefore depend less on expectations surrounding the GST rate reduction and more on actual retail demand, replacement purchases and corporate earnings.
Disclaimer: The stock-market views, target prices and recommendations referred to in this article belong to the respective analysts and brokerages. They should not be treated as investment advice. Readers should conduct their own research and consult a SEBI-registered investment adviser before making investment decisions.
