Auto shares reversed early losses to trade in the green on Tuesday, aided by value buying and stock-specific buying interest after a sharp decline earlier in the session, analysts said.
The Nifty Auto index, which was among the worst-performing sectoral indices in early trade, fell as much as 1.3 percent to 26,067.70 after the Delhi government announced a new electric vehicle (EV) policy. The index had declined more than 2 percent in the previous session.
Auto stocks came under pressure after the Delhi government said it plans to register only electric three-wheelers from January 1, 2027, and electric two-wheelers from April 1, 2028, prompting a shift away from internal combustion engine vehicles.
"In light of India's relative disadvantage in the battery supply chain, pushing EV is on a net basis negative for the Indian economy as well as the overall Indian automobile sector," analysts led by Yogesh Aggarwal of HSBC told Reuters.
However, around noon, value buying emerged and the Nifty Auto index erased all its losses to turn positive. It touched an intraday high of 26,629.65, up 0.8 percent.
Nitant Darekar, Research Analyst at Bonanza noted that Nifty Auto's intraday reversal reflects the market looking past the headline shock.
"As participants reassessed, the narrative flipped from disruption to opportunity: with the Rs 15,000 crore policy excluding strong hybrids and effective 1 July, battery-EV makers stand to benefit. Tata Motors, Mahindra & Mahindra and two-wheeler players TVS and Bajaj are positioned to gain from a fresh scrappage-led replacement cycle, while value-buying in heavyweights lifted the index up to 0.78%."
Stock-specific buying after bullish brokerage calls also lifted the investor sentiment.
Maruti Suzuki India was the top gainer, rising as much as 5 percent after Jefferies upgraded the stock to "Buy" and raised its target price to Rs 16,500 per share, citing improving demand prospects and easing cost pressures.
The brokerage said the revised target price implies an upside of around 23 percent from the previous session's closing price. It added that stronger passenger vehicle demand and lower crude oil prices have eased demand concerns, while softer metal prices are expected to reduce margin risks for the country's largest carmaker.
Tata Motors Passenger Vehicles and Exide Industries also advanced 2.10 percent and 1.28 percent, respectively.
"The auto sector has been in a consolidation phase since the last couple of months. We are now witnessing stock-specific buying interest within the sector. Although the sectoral index is yet to give a breakout, stocks with good price-volume action could see relative outperformance in the near term. Stocks like Ather Energy, Maruti and Minda Corp from the auto and auto ancillary space can do well in the short term," added Ruchit Jain, Vice President – Technical Research, Motilal Oswal Financial Services.
Taher Badshah of Invesco Mutual Fund told CNBC-TV18, "Delhi leads India's push towards EV adoption. More positive on Indian auto OEMs across two- and four-wheelers. Likes auto ancillaries on wallet share growth potential. Oil prices have retraced, auto demand remains strong."
Brent crude remained below $73 a barrel.
Ponmudi R, CEO, Enrich Money noted "the policy is specific to Delhi and does not materially alter the demand outlook for the overall Indian automobile industry. Delhi represents only a small portion of the country's vehicle sales, while automakers have already been steadily increasing their EV offerings as part of their long-term strategy. The sharp decline in crude oil prices, easing inflation concerns, expectations of stronger consumer demand, and attractive valuations after the initial sell-off encouraged bargain buying across leading auto stocks. As a result, the sector recovered strongly, with investors shifting their focus from short-term policy headlines to the industry's long-term growth fundamentals."
HSBC maintained its "Buy" rating on Mahindra & Mahindra with a target price of Rs 4,200 per share. The brokerage said EV penetration in passenger vehicles has increased sharply and OEM margins are likely to remain strong in FY27 and FY28.
Auto component stocks such as Bosch and Uno Minda also traded higher.
Nomura said the Delhi EV policy includes incentives for electric vehicles, charging infrastructure and tax concessions, with the government proposing to invest Rs 15,000 crore during FY27-30.
The brokerage said Mahindra & Mahindra, Tata Motors Passenger Vehicles, Ather Energy and Sona BLW are likely to be key beneficiaries, adding that the policy strengthens the push for electric vehicle adoption.
Among other auto stocks, Bajaj Auto, Mahindra & Mahindra, Ashok Leyland and TVS Motor Company gained up to 1 percent.
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