Auto sector margins may improve from third quarter but El Niño, West Asia crisis key risks: Report

Automobile sector margins are expected to recover gradually beyond the second quarter of FY27 as price hikes by manufacturers help offset higher commodity costs, according to a report by Motilal Oswal Financial Services.

Automobile sector margins are expected to recover gradually beyond the second quarter of FY27 as price hikes by manufacturers help offset higher commodity costs, according to a report by Motilal Oswal Financial Services. However, the potential impact of El Niño and further escalation of the West Asia crisis remain key risks for the sector.

The report said automobile companies and component manufacturers continue to face pressure from higher commodity costs. However, most of the impact has already been reflected in the first quarter results, while price increases by original equipment manufacturers (OEMs) are expected to provide some relief. "As a result, we expect margins for the sector to revive gradually beyond 2Q," the report said.

Automobile sales remained strong across segments in the second quarter of FY27, supported by a favourable base in the same period last year and increased dispatches ahead of the festive season. Sustained freight activity also supported double-digit growth in the commercial vehicle segment despite macroeconomic challenges. During the second quarter, passenger vehicles recorded year-on-year growth of 31.2 per cent, while commercial vehicles grew by around 29 per cent. Internal combustion engine (ICE) two-wheelers recorded growth of 10.4 per cent.

September 2026 also witnessed strong growth across segments, partly due to a low base in the previous year, when original equipment manufacturers deferred dispatches to take advantage of goods and services tax (GST) rate cuts. ICE two-wheelers recorded around 11 per cent year-on-year growth during the month, while passenger vehicles posted around 22 per cent growth. The report said the first half of FY27 witnessed strong demand momentum across the automobile industry. However, growth rates are expected to moderate in the coming quarters as the low base gradually normalises across segments.

While price hikes are expected to support margins, the report identified the possible impact of El Niño during the current year and further escalation of the West Asia crisis as factors requiring close monitoring. "Remaining monitorable are the probable impact of El Niño expected in the current year and the escalation of the West Asia crisis again," the report said.

The outlook indicates that while automobile companies may see a gradual improvement in margins beyond the second quarter, external risks and the normalisation of growth rates will remain important factors to watch in the coming quarters. (ANI)