India's Auto Industry Faces Margin Squeeze Amid Strong Growth

India's auto sector maintains demand momentum due to GST benefits, despite pressures from high commodity costs and weak global markets. Kotak Institutional Equities reports OEMs experience limited EBITDA growth. The sector sees strong volume growth, but margins face challenges, particularly in tractors, commercial vehicles, and tyre companies.

The latest research from Kotak Institutional Equities suggests that India's automobile sector is poised to sustain strong demand momentum, buoyed by GST 2.0 benefits. However, persistent commodity-cost pressures and global market weaknesses are predicted to keep profit margins constrained.

The report anticipates that while margin pressures may lighten sequentially for most original equipment manufacturers (OEMs), raw-material headwinds will persist, particularly affecting tractors, commercial vehicles, and tyre companies during the second quarter of FY27 due to high rubber and aluminium prices.

Volume growth surged in the auto sector, with OEM volumes jumping 26% year-on-year in the first quarter of FY27. Despite this growth, elevated commodity costs have squeezed EBITDA growth to 8.2%, with margins compressed by 210 basis points to 13.1%. Key factors include robust domestic demand and an advantageous product mix, though challenges in gross margins transfix the sector.