Auto Sector Enters Budget Season on Strong Demand, Q3 Earnings in Focus

India’s automobile sector is heading into the Union Budget with demand momentum firmly intact and expectations of a strong third-quarter earnings performance, as volumes remain resilient even after the festive season and cost pressures stay largely manageable.

Industry trends indicate that broad-based demand recovery across segments, combined with operating leverage and moderating discounts, is setting the stage for healthy profit growth in Q3FY26.

Demands Hold Up Beyond Festive Boost

One of the key positives for the sector has been the sustained demand after the festive period, a phase that typically sees a slowdown. Retail and wholesale volumes have remained firm through November and December.

Aggregate auto volumes for listed manufacturers grew in the mid-to-high teens year-on-year during the third quarter. The growth was spread across two-wheelers, passenger vehicles, commercial vehicles and tractors. Commercial vehicles and tractors have emerged as standout segments, supported by infrastructure activity, freight movement and rural demand. 

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Segment-wise Performance Remains Broad-Based

Two-wheeler demand has been led by recovery in entry-level motorcycles and scooters, aided by improving affordability and stable financing conditions. Passenger vehicles have continued to post double-digit growth, supported by steady demand for utility vehicles. Discounts have begun to ease sequentially.

Commercial vehicle makers have reported strong volume growth, signalling continued momentum in logistics and construction activity. Tractor demand has also remained robust, and is being helped by improving rural sentiment and replacement demand.

Earnings Outlook

On the earnings front, auto manufacturers are expected to report strong double-digit revenue growth in Q3, driven primarily by volume expansion. While certain input costs, such as precious metals, have moved higher, the impact is expected to be slightly offset by softer steel prices, better product mix, and leverage in operations.

Margins are expected to improve modestly on a year-on-year basis, with most manufacturers avoiding any meaningful margin contraction. As a result, sector-wide EBITDA and profit growth is likely to remain healthy. Several OEMs are also expected to deliver strong earnings acceleration.

Auto Ancillaries To Benefit From OEM momentum

Auto ancillary companies are also expected to post steady revenue growth in the third quarter, benefiting from higher OEM production levels. Margin performance, however, may vary across players depending on input cost exposure and product mix.

Tyre manufacturers are likely to see margin support from lower raw material costs. Certain component makers could also face near-term pressure due to cost pass-through delays or customer-specific factors.

Budget Expectations

As the Union Budget approaches, the auto sector will be watching for measures that support consumption, infrastructure spending and rural income. All of these have a direct bearing on vehicle demand. Policy continuity on electric mobility, clarity on taxation, and incentives linked to manufacturing and exports remain key expectations.

Given the lean inventory levels reported by manufacturers, any positive policy signals could help sustain volume momentum into the final quarter of the financial year.

Outlook Remains Constructive

With demand holding up across segments, discounts moderating, and inventories under control, the auto sector enters the Budget season on a relatively strong footing. Analysts expect this momentum to extend into the coming quarters, provided macro conditions remain supportive and policy continuity is maintained.

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