Auto demand likely to remain strong, easing crude, aluminium, PGM prices to support margins: Kotak
New Delhi, June 30
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.
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.
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.
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
Reader Comments
Interesting analysis. But I'm skeptical about double-digit growth continuing with inflation still biting middle-class budgets. Two-wheelers might see good demand but PV growth could slow down.
Good to see Kotak being optimistic! But what about EV adoption? With FAME subsidies likely to change, that could impact demand in a different way. Also, dealers are sitting on high inventory in some segments - hope this gets addressed.
As someone planning to buy a new car, this is reassuring. But I'm waiting for the actual price cuts to reflect at dealerships rather than just analyst predictions. Commodity prices cooling is good but manufacturers should pass on savings.
Good analysis from Kotak. The resilience in demand despite fuel price hikes shows the underlying strength of the Indian economy. Rural demand for two-wheelers has been particularly impressive. Let's hope the GST tailwinds materialise as expected.
One concern: the report mentions steel and rubber remaining firm, which will impact CV and tractor makers. With the monsoon outlook uncertain and farm incomes volatile, tractor demand could be patchy. Need more focus on the rural story alongside urban PV demand.
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