Fund Manager Talk | Auto entering coexistence era of ICE and EVs, HDFC AMC’s Priya Ranjan explains

Edited excerpts from a chat:

Let’s start with the pulse of the auto sector. Where are we in the auto industry cycle, especially when it comes to 2-wheelers and 4-wheelers?
2W and passenger vehicles are more structural segments of the automotive universe and they generally have an upward trajectory over the long term but in the short term we sometimes see demand volatility due to changes in consumer confidence, interest rates and disposable income growth. Both the segments are driven by lower vehicle penetration in the medium to long-term. While we see some demand softness in passenger vehicle growth currently, 2W performance continues to be on an upward trajectory driven by rural growth. On the other hand, commercial vehicle segment is also witnessing a weak demand environment due to deceleration in economic activities as well as weakness in globe trade amidst the global tariff war. However, demand stimulus from government tax cuts, interest rate reduction and upcoming pay commission revision for government and PSU employees could propel urban and Passenger Vehicle demand. Thus, both 2W and PV could witness reasonable growth from a 1-2yrs perspective although near term PV demand may be lacklustre.

You manage the HDFC Transportation and Logistics Fund. How are you positioning the portfolio today? Is it more towards four-wheelers, two-wheelers, or the unsung heroes in the ancillaries?
We build our portfolio on a bottom-up basis without a specific preference for a particular segment. The idea is to diversify the fund across various segments and position the fund optimally to make the most of the divergent business cycles of 2Ws, 4Ws, CVs, Logistics etc. We usually position our portfolio with mix of auto and transport subsegments, including ancillary and logistics companies where we see healthy earnings growth potential and a business moat.

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EVs have dominated the headlines, but the numbers still show ICE vehicles holding strong. Are we witnessing a long transition phase, or is the EV narrative running ahead of itself?
While EVs dominate news headlines, the ground reality is more nuanced. ICE vehicles continue to lead volumes across most categories, especially in rural and price-sensitive markets. This resilience is rooted in a mature support ecosystem, lower upfront costs, and better range reliability—factors that EVs are still catching up on. EV transition is in its nascent stage. Infrastructure rollout, battery technology, and cost parity will take time to mature. Meanwhile, ICE vehicles will remain dominant in several key segments, especially in commercial and entry-level passenger vehicles. We believe in businesses that are not only beneficiaries of today’s ICE demand but are also laying the groundwork for the EV future—be it through R&D, partnerships, or product diversification. We view this not as a binary shift, but a “coexistence era” where both technologies will evolve in parallel.
From a valuation standpoint, how do you weigh high-growth but richly priced EV bets against legacy players that may be slower movers but trade at more reasonable multiples?
From a valuation standpoint, we focus on balancing long-term growth potential with near-term earnings visibility and capital efficiency. EV-focused companies often command premium valuations, largely driven by their future promise. While some are backed by strong innovation and a first-mover advantage, many are yet to demonstrate consistent profitability or scale. We remain cautious about paying for narratives that may take years to materialize, especially when execution risks are high.

How do you think India-UK FTA will impact some of our listed players?
We anticipate the India-UK FTA to have a limited direct impact on most listed auto players, primarily due to the differing consumer profiles and market dynamics of the two countries. The UK automotive market caters largely to high-end, premium vehicles, whereas India is more focused on value-driven, mass-market segments. This divergence in consumer preferences means there is relatively little overlap in product offerings. Additionally, the UK has a relatively small automotive manufacturing base, especially when compared to the EU, which limits the potential for large-scale bilateral trade in vehicles or components. That said, niche opportunities may emerge for select Indian auto component exporters and suppliers to tap into the UK’s aftermarket or specialized segments. Overall, while the FTA may ease some trade processes and tariffs, we do not expect a material shift in demand or export volumes for most mainstream Indian auto companies in the near term.

How do interest rate moves impact the auto story? With more rate cuts expected in 2025, are we looking at a financing-driven demand boom?
Financing is always an important factor for automotive accessibility across the globe and India is no exception. When interest rates decline, borrowing costs drop, making EMIs more affordable and widens access to credit—especially for price-sensitive consumers in entry-level and mid-segment vehicles. With potential rate cuts expected in 2025, we anticipate a strong financing-driven demand boost. Lower rates could unlock demand among first-time buyers and rural/ semi-urban consumers who have traditionally faced credit constraints. Commercial vehicle demand should also benefit as fleet operators take advantage of cheaper financing to expand or upgrade their fleets.

There’s also a consumption angle here. As incomes rise and rural demand improves, are you seeing any early signals of pickup in entry-level vehicles?
Yes, we are witnessing early but encouraging signals of a pickup in entry-level vehicle demand, particularly in rural and semi-urban markets. This revival is being driven by a confluence of factors: improving rural incomes due to better crop realizations and MSP hikes, easing inflation, and targeted government schemes boosting rural employment and infrastructure. Normal/Above normal monsoon forecasts for 2025 also bode well for rural incomes and consequently, rural auto demand.