Auto Margins Set for Recovery, but El Niño and West Asia Crisis Loom
Automobile margins are set to revive as price hikes offset costs, but El Niño and West Asia tensions pose significant risks, warns Motilal Oswal.
The Indian automobile industry is eyeing a gradual recovery in its profit margins starting from the third quarter of FY27. According to a recent report by Motilal Oswal Financial Services, manufacturers are expected to offset the burden of rising commodity costs through strategic price hikes, providing a much-needed cushion for both original equipment manufacturers (OEMs) and component suppliers.
The Path to Margin Recovery
For some time, the auto sector and its component manufacturers have been grappling with the pressure of escalating commodity prices. However, the report suggests that the worst of this impact was already mirrored in the first-quarter results. As OEMs implement price increases, the industry is poised for a revival.
"As a result, we expect margins for the sector to revive gradually beyond 2Q," the report stated.
Strong Performance Across All Segments
The second quarter of FY27 witnessed robust sales across various vehicle categories. This surge was fueled by a combination of a favorable base from the previous year and an increase in dispatches to prepare for the festive season. Even amidst macroeconomic hurdles, the commercial vehicle segment saw double-digit growth, bolstered by steady freight activity.
The growth figures for the second quarter highlight a strong momentum:
- Passenger Vehicles: Recorded a significant year-on-year growth of 31.2 per cent.
- Commercial Vehicles: Grew by approximately 29 per cent.
- ICE Two-Wheelers: Saw a growth of 10.4 per cent.
September Surge and the 'Low Base' Effect
September 2026 continued this trend of strong growth. This was partly attributed to the "low base" of the previous year, a period when OEMs had deferred dispatches to capitalize on GST rate cuts. During this month, passenger vehicles posted a growth of around 22 per cent, while internal combustion engine (ICE) two-wheelers grew by roughly 11 per cent.
Looking Ahead: The Risks and Moderation
While the first half of FY27 has been characterized by strong demand, the report warns that growth rates are likely to moderate in the coming quarters as the low base effect normalizes across different segments.
Key External Risks to Monitor
Despite the optimistic outlook for margins, the report identifies two critical external factors that could disrupt the recovery process:
- El Niño: The probable impact of El Niño during the current year remains a significant concern for the industry.
- West Asia Crisis: Any further escalation of the crisis in West Asia is viewed as a major risk factor that requires close monitoring.
In summary, while the trajectory for automobile companies points toward improving margins beyond the second quarter, the industry remains vulnerable to global geopolitical tensions and climatic shifts.