A Kotak report suggests India’s auto sector will see strong festive sales but face profit pressure. Rising raw material costs are expected to shrink operating margins, overshadowing healthy revenue growth from higher vehicle sales and price hikes.
India’s automobile sector is heading into the festive season with strong demand momentum, but rising raw material costs could put pressure on manufacturers’ profitability despite higher vehicle sales, claimed a report by Kotak Institutional Equities.
Profitability Concerns Amid Sales Boom
In its automobile and components sector earnings preview, Kotak said strong retail demand following GST cuts has supported vehicle production across passenger vehicles, two-wheelers and commercial vehicles. However, higher steel, rubber and crude-linked costs are expected to weigh on operating margins. The report stated, “RM cost spikes overshadow healthy topline growth.”
Kotak expects revenues of most automobile manufacturers under its coverage to increase by around 29 per cent year-on-year in the September quarter of FY27, supported by higher sales volumes, vehicle price increases and a favourable product mix. However, operating margins are expected to decline by around 200 basis points year-on-year, even as revenues rise.
The report attributed the higher revenues partly to “strong retail momentum owing to GST cuts,” along with higher average selling prices and favourable currency movements. The contrasting trends highlight the challenge manufacturers could face in maintaining profitability during the festive buying season, even if consumer demand remains healthy.
Tyre Sector to be Hit Hardest
Kotak expects gross margins to decline across most automobile manufacturers because of rising commodity costs, although a better product mix, favourable currency movements and lower discounts could provide some relief. The pressure is expected to be particularly severe for tyre manufacturers, where higher rubber and crude oil prices are likely to offset the benefits of stronger demand.
According to the report, operating margins of major domestic tyre manufacturers could decline by 400-480 basis points year-on-year in the September quarter, despite projected revenue growth of 16-26 per cent.
Outlook for Festive Quarter
The report warned, “We expect RM headwinds to persist in 3QFY27E, which will be offset by price hikes taken by the companies.” The warning is significant as the December quarter includes the festive buying season, traditionally an important period for automobile purchases. (ANI)
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