Rising costs may hurt auto margins in FY27 despite 22% growth in Q4 FY26: Kotak report

India’s automobile industry entered FY27 on the back of a strong March quarter, with vehicle manufacturers reporting a combined 22 per cent year-on-year volume increase. However, a new report from Kotak Institutional Equities suggests that the sector may face profitability challenges in the coming months as raw material costs continue to rise.

The brokerage highlighted that automakers across key segments benefited from healthy demand during the March quarter of FY26. Passenger vehicles, two-wheelers, commercial vehicles and tractors all contributed to the growth momentum, helping original equipment manufacturers (OEMs) post robust sales volumes.

Demand holds firm

According to the report, demand conditions across most vehicle categories are expected to remain largely unchanged in the near term. The strong quarterly performance was supported by several factors, including GST reductions, tractor subsidies, vehicle price hikes implemented by manufacturers and lower discounting levels in multiple segments.

“Overall, OEMs saw 22 per cent yoy volume growth, led by strong 2W/PV/CV segments and tractors,” the report noted.

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The brokerage also said that domestic market strength extended beyond vehicle manufacturers. Auto component suppliers and tyre makers continued to benefit from steady local demand even as international markets remained under pressure.

“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.

Profitability under pressure

While demand remains resilient, Kotak expects earnings pressure to emerge during the first half of FY27.

“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.

The concern stems from a recent surge in commodity prices. The brokerage pointed to higher crude oil, aluminium and rubber prices, while domestic steel prices also remain elevated. According to the report, these increases have been influenced by the ongoing conflict in West Asia.

“The conflict in West Asia has caused a sharp rise in raw materials prices, primarily crude and aluminium prices,” the report said.

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Commercial vehicles face additional risk

Kotak also flagged potential challenges for the commercial vehicle industry. Rising diesel prices could affect transport operators’ profitability, potentially slowing demand growth in the segment.

“The increase in diesel prices–which accounts for 30-50 per cent of fleet TCO–begets caution in the outlook on CV cycle,” it said.

Despite stable demand expectations, the brokerage maintained a cautious stance on the sector, citing geopolitical uncertainty and the possibility of sustained cost pressures affecting margins across vehicle categories.

Source