Historically, the long-term weightage allocation to the auto sector has been around 6%. The auto sector is currently the fourth largest by weightage, after financial services, IT, and oil & gas, which have weightages of 27.5%, 9.25%, and 8.53%, respectively, as of July-end, NSDL data showed.
In July, FPIs invested $735 million (₹6,137 crore) in the auto sector, comprising 18% of the total inflow of $3.8 billion (₹32,322 crore). Equity portfolio value of the auto sector within the FPI portfolio rose by 45% year-to-date, reaching $72 billion by July-end, while total equity value of FPIs increased by 20.7% to $890 million. MSCI India, the benchmark index for foreign investors, allocates 13.31% of its weight to the auto sector within the consumer discretionary category, with Mahindra & Mahindra having the highest weight within discretionary stocks at 2.15%.So, why are FPIs boosting their holdings in the auto sector despite a recent moderation in vehicle sales? Firstly, earnings growth of auto companies has surpassed market expectations, leading to earnings upgrades. For example, India’s largest carmaker, Maruti Suzuki, delivered an operating profit margin nearly 100 basis points higher than analysts’ forecasts, thanks to lower raw material prices and improving average selling prices. Similarly, Bajaj Auto maintained strong margins despite growing sales of lower margin-yielding electric scooters, helped by dynamic profit and loss management.Secondly, earnings growth for auto companies is projected at 15-18% this financial year, propelled by margin expansion. The auto sector’s profit contribution to the Nifty 50 is expected at ₹67,600 crore in FY25, rising from ₹59,500 crore last fiscal, with a contribution of 8%.
Lastly, valuations for several companies still remain attractive, even as the broader market trades at higher valuations. For instance, Maruti and Hero MotoCorp are trading close to their long-term averages.