Auto demand to remain steady, margins may come under pressure in H1 FY27: Kotak
New Delhi, June 2
Demand across India's automobile sector is expected to remain broadly stable in the near term, but rising raw material costs are likely to squeeze profit margins of automakers during the first half of FY27, according to a sector update report by Kotak Institutional Equities.
The brokerage said the automobile industry delivered a strong performance in the March quarter of FY26, supported by healthy demand across segments and the benefits from recent policy measures.
"While we expect demand trends across most segments to remain steady in the near term, profitability trends will worsen during 1HFY27E," Kotak Institutional Equities said in its report.
According to the report, original equipment manufacturers (OEMs) recorded strong volume growth during the quarter, led by two-wheelers, passenger vehicles, commercial vehicles and tractors.
"Overall, OEMs saw 22% yoy volume growth, led by strong 2W/PV/CV segments and tractors," the report noted.
Kotak said the strong operating performance was aided by GST rate cuts, subsidies in the tractor segment, price increases undertaken by manufacturers and lower discounts across several vehicle categories.
The report added that domestic demand also supported growth for auto component makers and tyre companies despite weakness in overseas markets.
"Steady domestic demand across 2W/tractor/CV/PV... supported revenue growth for domestic suppliers, offset by sustained weakness in global auto markets," the brokerage said.
However, the brokerage cautioned that rising commodity prices linked to the ongoing conflict in West Asia could put pressure on margins in the coming quarters.
According to the report, crude oil, rubber and aluminium prices have risen sharply from levels seen during the March quarter, while domestic steel prices remain elevated.
"The conflict in West Asia has caused a sharp rise in raw materials prices, primarily crude and aluminium prices," the report said.
Kotak noted that higher input costs could affect profitability across passenger vehicle, commercial vehicle, two-wheeler and tractor manufacturers if current commodity prices persist.
The report also flagged concerns for the commercial vehicle segment, saying higher diesel prices could affect fleet operators' profitability and moderate industry growth.
"The increase in diesel prices--which accounts for 30-50% of fleet TCO--begets caution in the outlook on CV cycle," it said.
While demand conditions remain stable, the brokerage maintained a cautious view on the sector due to the risk of margin pressure from rising raw material costs and geopolitical uncertainties.
— ANI
Reader Comments
As someone who works in auto components supply chain, I can confirm that input costs have been rising sharply. Domestic demand is keeping us afloat, but export markets are a mess due to global slowdown. Kotak's analysis is spot on about the margin squeeze—we're already seeing smaller players struggle. The GST rate cuts and tractor subsidies helped in Q4, but those are temporary boosts. Long-term, the industry needs more policy support on raw material pricing.
The 22% volume growth sounds great on paper, but one has to wonder if it's sustainable. My husband is in the CV business, and with diesel prices creeping up, fleet operators are getting nervous. The report rightly points out that diesel accounts for 30-50% of total cost of ownership for trucks. If fuel prices don't stabilize, we might see a slowdown in the CV cycle sooner than expected. Also, why is the government not intervening on aluminium and rubber prices? 🤔
Honestly, this is a mixed bag for the auto sector. On one hand, the demand momentum is strong thanks to GST cuts and subsidies, especially in tractors and two-wheelers. On the other, the global headwinds from West Asia are hitting commodity prices hard. The brokerage's cautious view is justified—if crude stays above $85/barrel, margins will definitely get compressed. I hope automakers have hedged their raw material exposure well. Also, electrification might offer some relief on the fuel cost side but that's a longer-term play.
I appreciate the detailed sectoral breakdown in this Kotak report. It's interesting that the two-wheeler and PV segments are leading the volume growth, while CVs face headwinds from diesel costs. The mention of tyre and auto component companies benefiting from domestic demand is reassuring. However, I wish the report had also touched on how EV adoption might alter these dynamics in FY27. With FAME II subsidies and state-level EV policies, the margin story for EV-focused OEMs could be different.
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