Auto sector to post strong Q1FY27 growth; high raw material costs likely to weigh on profits: Report

Domestic auto sector is expected to report strong demand-led growth in Q1FY27, but rising raw material costs are likely to weigh on profitability, according to a report by Motilal Oswal Financial Services (MOFS). The report noted, the aggregate automobile demand across original equipment manufacturers (OEMs) recorded robust growth of 24.5 per cent year-on-year in the first quarter of FY27.

The expansion was led by two-wheelers, surging 26 per cent, followed by passenger vehicles at 24 per cent, commercial vehicles at 20 per cent and tractors at 18 per cent. "Demand has continued to be encouraging across segments in 1Q, as reflected in strong retail growth reported in Vahan. As a result, the overall auto industry volume growth for 1Q stood at 24.5 PER CENT YoY," the report said.

Despite the healthy demand environment, automakers' earnings are expected to remain under pressure as elevated raw material costs, which surged during the latter part of Q4FY26 and persisted through much of Q1FY27, weighed on margins. MOFS expects "2W OEMs to post 32 per cent revenue growth, followed by PV OEMs at 15 per cent and CV OEMs at 18 per cent."

It flagged, "prices of key inputs have been on an uptrend since 3Q, and despite the price hikes taken, there is likely to be some under-recovery due to the sharp increase in a short span." Sustained margin pressure from higher input costs is likely to limit profitability. "Auto ancillaries are likely to post ~15 per cent revenue growth and a much lower PAT growth of 10 per cent due to margin pressure," it said.

The Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin for several OEMs is estimated to decline 190bp YoY to 9.6 per cent, as per the report. In the passenger vehicle (PV) segment, most original equipment manufacturers (OEMs) are expected to see operating margins contract by 100-150 basis points in the first quarter.

Commercial vehicle (CV) manufacturers are likely to face an even steeper margin decline of 100-200 basis points year-on-year. In contrast, two-wheeler makers with significant export exposure are expected to be relatively insulated from the impact, supported by stronger overseas demand and a favourable business mix,as per the report. (ANI)