India’s auto sector is poised for strong growth, with resilient demand despite fuel price hikes. A report by Kotak Institutional Equities notes that easing commodity costs will provide significant relief to automakers’ profit margins.
India’s automobile sector is likely to remain on a strong footing in the coming quarters, as demand has remained resilient despite the hike in petrol and diesel prices. In addition, easing commodity costs are expected to provide much-needed relief to automakers’ profit margins, according to a report by Kotak Institutional Equities.
Resilient Demand and Strong Outlook
The brokerage said that demand across key vehicle segments has remained robust despite recent fuel price hikes and geopolitical uncertainties, indicating healthy underlying consumer sentiment. “Demand remains resilient despite geopolitical concerns,” the report said, adding that “despite fuel and vehicle price increases amid geopolitical uncertainty, demand has remained resilient, as retail volumes grew in double digits in most segments.”
Kotak expects this momentum to continue through the first half of FY27, supported by GST-led tailwinds, before a higher base effect moderates growth in the second half. It expects passenger vehicle (PV) and two-wheeler (2W) volumes to post high single-digit year-on-year growth during FY27.
Easing Commodity Costs to Boost Margins
On the cost front, the report highlighted that the sharp run-up in key commodity prices is beginning to reverse, improving the earnings outlook for original equipment manufacturers (OEMs). Prices of crude oil, aluminium and platinum group metals (PGMs) have corrected significantly following easing geopolitical tensions, reducing raw material pressure on the industry. “After the US-Iran ceasefire, PGM, crude oil and aluminium have corrected by 20% from their peak, auguring well for OEMs,” the report noted.
Kotak believes the worst of the commodity-led margin pressure is now behind automakers. It said higher commodity costs are likely to weigh on gross margins in the June quarter, but the pressure should ease from the second quarter of FY27 as lower input costs start reflecting in financials. “At current spot prices, we expect gross margin trends to improve from 2QFY27E,” the report said.
The brokerage also pointed out that lower industrial LNG prices, recent vehicle price hikes by manufacturers, export tailwinds from a stronger US dollar and commodity hedges will further help companies offset earlier cost pressures.
Differentiated Impact Across Segments
According to the report, passenger vehicle and two-wheeler manufacturers are likely to benefit more from the decline in aluminium and PGM prices than commercial vehicle and tractor makers, whose input costs are more heavily linked to steel and rubber, both of which remain relatively firm. (ANI)
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