Whalesbook
OEM Demand Surges, But Margins Shrink
Original equipment manufacturers (OEMs) in the Indian automotive sector experienced significant demand growth in the fourth quarter of fiscal year 2026, with aggregate demand across companies covered rising 23% year-on-year. This growth was broad-based: two-wheelers increased by 25%, passenger vehicles (PVs) by 15%, commercial vehicles (CVs) by 22%, and tractors by 33%. Strong retail growth reported via Vahan data further supports the positive demand picture. Despite this volume expansion, OEM profitability is expected to slow, with earnings growth projected at a modest 9% year-on-year, ex-TMPV. This pressure on margins comes from higher input costs, leading to an estimated 20 basis point decline in aggregate OEM EBITDA margins, settling at 14.1%.
Auto Parts Firms Show Stronger Profits
In contrast to OEMs, auto parts companies are set for better earnings. Analysts project these firms to achieve approximately 14% revenue growth, coupled with stronger profit expansion of around 20% at the operating level and 23% at the net profit level for the fourth quarter. Several component suppliers stood out, including Craftsman Automation with 54% profit growth, Samvardhana Motherson International with 30%, and major tire manufacturers like Apollo Tyres (+45%), CEAT (+78%), and MRF (+41%). This difference shows that auto parts suppliers are handling rising costs better than car makers, possibly due to better cost visibility and technology.
OEM Segment Performance Varies Amidst Risks
Within the OEM segment, performance is not uniform. Leading companies such as Bajaj Auto (+30%), Hero MotoCorp (+26%), TVS Motor Company (+18%), and Mahindra & Mahindra (+33%) posted double-digit year-on-year earnings growth. However, Hyundai Motor India stands out as a significant underperformer, anticipating a 27% decline in its profit after tax. In the parts sector, Balkrishna Industries is expected to report a 10% decline in profit after tax.
Global Tensions and Costs Sour Auto Outlook
Analysts have adopted a cautious outlook for the broader auto sector, primarily driven by rising geopolitical tensions in the Middle East. This has led to a surge in commodity prices, with aluminium prices rising nearly 20% and steel prices by 10% year-on-year in Q4FY26. Crude oil prices have also climbed significantly, nearing $104 per barrel as of early April 2026, increasing input cost pressures and logistics expenses. These tensions threaten India's export markets, particularly in the MENA region, which accounts for approximately 25% of India's passenger vehicle export value. These factors have prompted considerable earnings estimate cuts, more pronounced for FY27 than FY28. Notable earnings per share (EPS) reductions include CEAT (-22%), Hyundai Motor India (-16%), and Apollo Tyres (-14%).
Valuations and Competitive Standing
Amidst these challenges, competitive positioning and valuation are critical. Maruti Suzuki trades at a P/E of approximately 26, while Mahindra & Mahindra is valued around 21 times earnings. TVS Motor Company carries higher growth expectations with a P/E of 51-61. Hyundai Motor India is trading at a P/E of nearly 40 times estimated earnings. In the auto parts sector, Endurance Technologies exhibits a P/E of 34.38, with an EV/EBITDA of 20.83, appearing more competitive against peers like Motherson Wiring (P/E 52.95). Samvardhana Motherson International holds a "Moderate Buy" consensus from analysts, with an average target price around ₹140.70 INR. The auto sector benchmark, Nifty Auto Index, fell 11.63% in March 2026 amid investor caution. Auto stocks have seen sharp drops in valuation, losing up to 27% in three months, with OEMs experiencing a higher impact than parts suppliers.
Outlook and Key Factors to Watch
Analysts maintain a cautious outlook, emphasizing that while demand momentum remains healthy, geopolitical risks and rising costs present significant challenges. However, they expect input costs may stabilize in the latter half of the fiscal year, potentially offering some relief. The sector's ability to manage supply chain uncertainties, pass on costs, and maintain margins will be key factors to watch. Companies with strong fundamentals, a strong product pipeline, and attractive valuations are expected to remain preferred investments.