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Indian auto sector to maintain growth momentum, margin pressure persists: Kotak
India’s auto sector is expected to sustain demand momentum, although commodity costs and weak global markets could limit margin expansion.
India’s automobile industry is expected to retain its growth momentum in the near term, with GST 2.0 likely to support demand across vehicle categories. However, automakers and component manufacturers could continue to face profitability challenges as raw material costs remain elevated and global automotive markets remain weak, says a Kotak Institutional Equities research report.
Strong first-quarter growth
The sector entered FY27 on a strong footing, with original equipment manufacturers (OEMs) recording a 26 per cent year-on-year increase in volumes during the first quarter. Growth was broad-based, with two-wheelers, passenger vehicles, commercial vehicles and tractors all contributing to the increase.
Auto OEM revenue, excluding Tata Motors PV, also climbed 26 per cent year-on-year. The increase was supported by volume growth of more than 20 per cent in major segments, along with price hikes and a favourable product mix.
The improvement in sales, however, did not translate into similar earnings growth. OEM EBITDA rose 8.2 per cent, while margins declined by 210 basis points to 13.1 per cent as higher commodity expenses weighed on profitability.
Ancillaries also see higher demand
Automotive component manufacturers benefited from stronger domestic vehicle production during the quarter. Revenue for auto-ancillary companies increased 17 per cent year-on-year in 1QFY27.
Passenger vehicle and tractor production grew by more than 20 per cent, while output in the commercial vehicle and two-wheeler segments increased at rates in the teens. Higher production volumes helped ancillary companies improve EBITDA by 9.8 per cent, with operating leverage and cost-control measures supporting earnings.
Raw-material inflation nevertheless remained a concern. Rising steel, rubber and sulphur costs cut gross margins for auto-ancillary companies by 200 basis points during the quarter.
Commodity costs remain a concern
Kotak expects some relief for OEM margins in the second quarter as crude, aluminium and precious-metal prices have moved lower from their peaks recorded during the first quarter.
The improvement is not expected to be uniform across the industry. Rubber prices remain around 30 per cent above their level a year earlier, while domestic steel prices have stayed firm.
Tractor, commercial vehicle and tyre manufacturers are therefore expected to remain more exposed to input-cost pressure in 2QFY27. The brokerage expects tyre companies in particular to see further deterioration in gross margins during the quarter, with conditions likely to improve only after the second half of FY27.
Although rubber and aluminium prices had eased from their highs towards the end of the first quarter, the overall cost environment remains a constraint on profitability. Kotak expects sequential margin pressure to moderate for most OEMs, while demand is likely to receive continued support from GST 2.0-led benefits across vehicle segments.
(With inputs from ANI)
