India's auto sector to see steady demand, but margins under pressure

India's auto sector is set for steady demand momentum thanks to GST 2.0 benefits, but a Kotak report warns of margin pressure from high commodity costs and global weakness, despite strong Q1 volume growth across segments.

India's automobile sector is likely to maintain steady demand momentum in the near term, supported by GST 2.0-led benefits across segments, however, persistent commodity-cost pressures and weakness in global auto markets are expected to keep margins under pressure, according to a research report by Kotak Institutional Equities.

The brokerage expects margin pressure to moderate sequentially for most original equipment manufacturers (OEMs), but sees continued raw-material headwinds for tractors, commercial vehicles and tyre companies in the second quarter of FY27d due elevated rubber and aluminium prices. Although, the brokerage noted that the rubber and aluminium prices came off highs towards the end of first quarter.

Strong Q1 FY27 Performance

The brokerage said the sector delivered strong volume growth in the first quarter of FY27, with OEM volumes rising 26 per cent year-on-year, led by robust performance across the 2W, PV, CV and tractor segments. Revenue for auto OEMs, excluding Tata Motors PV, rose 26 per cent, aided by more than 20 per cent volume growth in key segments, price increases and favourable product mix. However, EBITDA growth was limited to 8.2 per cent as higher commodity costs compressed margins by 210 basis points to 13.1 per cent.

Impact on Auto-Ancillary Sector

Domestic demand also supported auto-ancillary companies, whose revenues grew 17 per cent year-on-year in 1QFY27. Production growth in passenger vehicles and tractors exceeded 20 per cent, while commercial vehicle and two-wheeler production grew in the teens. Ancillary EBITDA increased 9.8 per cent, helped by operating leverage and cost-control measures. Nevertheless, higher steel, rubber and sulphur prices reduced gross margins by 200 basis points.

Future Outlook on Margins

Kotak said crude, aluminium and precious-metal prices have retreated from their first-quarter peaks, which should provide some sequential relief to OEM margins. However, rubber prices remain elevated at around 30 per cent higher year-on-year, while domestic steel prices have remained firm.

Tyre Companies to Face Headwinds

The brokerage expects tyre companies to face further gross-margin deterioration in 2QFY27 before conditions improve after the second half of FY27. (ANI)

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