India auto makers sell more vehicles, but rising costs could limit profit growth

India's auto sector expects strong Q2FY27 sales growth across most segments, but rising steel and copper prices threaten to squeeze profit margins and limit overall earnings growth for automakers and component makers.

India's automobile industry is heading into the Q2FY27 earnings season with strong wholesale volume growth across most segments, but rising raw-material costs are expected to put pressure on margins. Commercial vehicles, three-wheelers, passenger vehicles and two-wheelers are expected to report growth, while tractor volumes could decline.

Brokerage estimates point to revenue growth across several automakers and auto-component manufacturers. However, higher steel and copper prices, conversion costs and freight expenses could limit earnings growth despite higher sales.

The Nifty Auto index has declined 8.6% year-to-date, compared with an 11.4% fall in the Nifty 50. Investors will focus on whether strong volumes can translate into higher earnings despite rising costs.

Volume surge

Commercial vehicles are expected to lead volume growth in Q2FY27, with wholesale volumes projected to rise 32% year-on-year. Three-wheelers are expected to grow 31%, passenger vehicles 26% and two-wheelers 18%. Tractor volumes are projected to decline 4%.

Tata Motors' commercial vehicle business is expected to report 43% volume growth, while its passenger vehicle business is projected to grow 40%. Ashok Leyland's volumes are estimated to rise 32%.

Among two-wheeler manufacturers, TVS Motor is expected to lead with 27% volume growth, followed by Bajaj Auto at 20%, Eicher Motors at 16% and Hero MotoCorp at 10%.

Maruti Suzuki and Mahindra & Mahindra are both expected to report 26% growth in their respective passenger vehicle and auto businesses, while Hyundai Motor India is projected to grow 15%.

However, tougher year-on-year comparisons in the second half of FY27 could affect reported growth. Investors will also track festive-season retail sales, dealer inventory, bookings and the sustainability of demand.

Margin squeeze

Raw-material inflation is expected to weigh on profitability across the auto industry. According to commodity-price trends cited in Axis Capital's Q2FY27 preview, steel prices rose around 12% quarter-on-quarter, copper prices increased 6% and natural rubber (RSS4) prices rose 1%. Aluminium prices fell around 10%, offering some relief.

Brokerage estimates suggest that gross margins for two-wheeler and passenger vehicle manufacturers could face pressure of 100-150 basis points, while commercial vehicle makers could see a steeper impact of 150-200 basis points.

Price increases, a favourable product mix and operating leverage from higher sales could partly offset the higher costs. However, the extent of the relief will depend on manufacturers' pricing power, sourcing arrangements and expense control.

TVS Motor is expected to report revenue growth of 39% and EBITDA growth of 42%, with its EBITDA margin rising 28 basis points year-on-year to 13%. Bajaj Auto's revenue and EBITDA are projected to increase 24% and 23%, respectively, while its margin could decline 19 basis points to 20.3%.

Hero MotoCorp's revenue is expected to grow 20%, but EBITDA could rise just 6%. Its margin is projected to fall 182 basis points to 13.2%. Eicher Motors is expected to report revenue growth of 19% and EBITDA growth of 17%, with its margin declining 40 basis points to 24.1%. Royal Enfield's volume growth and price increases could partly offset higher input costs.

Passenger vehicle manufacturers are also expected to face margin pressure. Maruti Suzuki's revenue is projected to grow 28%, while EBITDA could decline 16%. Its margin is estimated to fall 413 basis points to 7.9%. Hyundai Motor India's revenue is expected to rise 17%, but EBITDA could decline 19%, with its margin falling 427 basis points to 9.6%.

Mahindra & Mahindra's auto business is projected to report revenue growth of 26% and EBITDA growth of 3%. Its margin could decline 266 basis points to 11.9%. Tata Motors' passenger vehicle business is expected to report revenue growth of 49% and EBITDA growth of 10%, despite a projected 150-basis-point decline in its margin to 4.2%.

In commercial vehicles, Tata Motors' business is expected to report revenue and EBITDA growth of 39% each. Ashok Leyland's revenue is projected to rise 37% and EBITDA 16%, while its margin could fall 187 basis points to 10.3%.

Earnings test

Electric two-wheeler manufacturers are expected to report mixed performances. Ather Energy's volumes are projected to rise around 40% and revenue 53% year-on-year, but its EBITDA margin is expected to remain negative at 2.6%. Demand, distribution expansion and its EL platform are expected to support growth, while capacity constraints and profitability remain concerns.

Ola Electric's volumes are projected to rise around 10% quarter-on-quarter but fall approximately 18% year-on-year. Revenue is expected to decline 28% year-on-year, and the company is likely to remain loss-making. Investors will track market share, customer service and the performance of its in-house battery cells.

Auto-component manufacturers are also expected to report revenue growth, although earnings could face pressure. Samvardhana Motherson's consolidated revenue and EBITDA are projected to rise 23% and 20%, respectively. Uno Minda's revenue is expected to increase 29% and EBITDA 22%.

Sona BLW's revenue is projected to grow 20%, while EBITDA could rise just 6%. Bharat Forge's standalone revenue is expected to increase 22%, with EBITDA growth of 6%. Apollo Tyres' consolidated revenue is projected to rise 19%, while EBITDA could decline 3% because of input-cost pressures.

Valuations also remain a focus for investors. Maruti Suzuki's FY28 estimated price-to-earnings (P/E) ratio of 18.1 times is below its five-year average of 34.22 times. TVS Motor trades at 36.3 times against its historical average of 48.57 times, while Hero MotoCorp's multiple of 15 times is below its average of 19.26 times.

Eicher Motors and Bajaj Auto trade at 28.3 times and 21.7 times FY28 estimated earnings, respectively, compared with five-year averages of 31.81 times and 24.25 times. Mahindra & Mahindra's multiple of 17.9 times is broadly in line with its average of 17.5 times. Ashok Leyland trades at 17.3 times, above its five-year average of 12.47 times.

Lower valuations do not guarantee a recovery in share prices. Investors will look for earnings growth to meet expectations and margins to recover as manufacturers respond to higher costs.

The key factors to watch during the Q2FY27 earnings season include festive-season retail demand, dealer inventories, the ability to pass on higher input costs, rural demand and tractor sales. Uneven monsoon conditions and El Niño risks could affect rural demand, while management commentary on replacement demand, fleet utilisation and the commercial vehicle cycle will offer clues about the sustainability of growth.

As the industry enters a period of tougher year-on-year comparisons in the second half of FY27, management guidance will be crucial in determining whether strong sales volumes can translate into sustained earnings growth.