India's automobile sector is expected to maintain strong demand momentum in the coming quarters, supported by resilient consumer sentiment and easing commodity costs, according to a report by Kotak Institutional Equities. The brokerage noted that demand across key vehicle segments has remained robust despite recent fuel price hikes and geopolitical uncertainties, indicating healthy underlying consumer sentiment.
Demand Resilience Amid Fuel Price Hikes
Kotak's report highlighted that retail volumes grew in double digits across most segments despite fuel and vehicle price increases. "Demand remains resilient despite geopolitical concerns," the report stated, adding that the momentum is likely to continue through the first half of FY27, buoyed by GST-related tailwinds. However, a higher base effect is expected to moderate growth in the second half of the fiscal year.
For FY27, the brokerage expects passenger vehicle (PV) and two-wheeler (2W) volumes to register high single-digit year-on-year growth. This outlook reflects sustained consumer interest and economic activity, even as global uncertainties persist.
Commodity Price Correction to Boost Margins
The report emphasized that a sharp correction in key commodity prices is improving the earnings outlook for original equipment manufacturers (OEMs). Prices of crude oil, aluminium, and platinum group metals (PGMs) have fallen significantly, easing raw material cost pressures. "After the US-Iran ceasefire, PGM, crude oil and aluminium have corrected by 20% from their peak, auguring well for OEMs," Kotak noted.
The brokerage believes the worst of the commodity-led margin pressure is now behind automakers. While higher input costs are likely to weigh on gross margins in the June quarter, the pressure should ease from the second quarter of FY27 as lower commodity prices begin to reflect in financials. "At current spot prices, we expect gross margin trends to improve from 2QFY27E," the report said.
Additional Tailwinds for Automakers
Kotak also pointed to other factors that will help offset earlier cost pressures. These include lower industrial LNG prices, recent vehicle price hikes by manufacturers, export tailwinds from a stronger US dollar, and commodity hedges. Together, these elements are expected to support profitability in the near to medium term.
The report noted that 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. The latter's input costs are more heavily linked to steel and rubber, which remain relatively firm.
Segmental Impact and Outlook
The brokerage's analysis suggests that the easing of commodity prices will have a differentiated impact across segments. PV and 2W OEMs, which have higher exposure to aluminium and PGMs in their production processes, stand to gain the most. In contrast, CV and tractor manufacturers face continued cost pressure from steel and rubber, limiting their margin upside.
Overall, Kotak maintains a positive stance on the auto sector, driven by strong demand fundamentals and improving cost dynamics. The report concludes that the combination of resilient demand, easing input prices, and supportive macroeconomic factors positions the industry for sustained growth in FY27.
