India's auto sector saw 26% volume growth in Q1 FY27, yet rising commodity costs are squeezing profit margins. Despite these sector-wide challenges, analysts at Kotak Institutional Equities have identified Mahindra & Mahindra, Eicher Motors, and TVS Motor as preferred choices. Investors are monitoring whether strong demand can help these companies manage rising costs in the coming quarters.
The Indian automotive industry is navigating a complex period characterized by record sales and compressed profitability. During the first quarter of fiscal year 2027, automotive original equipment manufacturers (OEMs) reported a 26% year-on-year surge in volumes. This growth was largely supported by the impact of GST 2.0, which helped drive sales across passenger vehicles, two-wheelers, and commercial vehicles. However, this volume growth has not directly translated into stronger profit margins.
While revenue numbers rose significantly, the broader industry faces a squeeze on profitability. Aggregate profit margins for OEMs declined by 210 basis points year-on-year to 13.1%. The primary driver behind this margin pressure is the rising cost of raw materials, particularly rubber and aluminum. While some commodity prices have shown signs of cooling off from their recent peaks, the sustained high cost of rubber has been a specific pain point for the industry.
Amid these headwinds, analysts at Kotak Institutional Equities have maintained a constructive outlook on specific players, favoring Mahindra & Mahindra, Eicher Motors, and TVS Motor. These companies are viewed as better positioned to navigate the current cost pressures compared to the wider sector. The brokerage suggests that while the overall industry is dealing with volatility, these specific stocks demonstrate a higher level of resilience against the ongoing margin compression.
The pressure on margins is not uniform across the entire automotive space. Tire manufacturers, for instance, are facing more acute challenges due to the steep increase in rubber prices, which have risen by roughly 30% compared to the previous year. While vehicle manufacturers are also dealing with cost pressures, they have shown different levels of ability to manage these through product mix adjustments and price changes. The brokerage expects that gross margin headwinds will likely persist through the first half of the current fiscal year before potentially moderating in the second half.
For investors, the key monitorable remains the evolution of raw material prices, particularly rubber. While there is an expectation of a cooling off in rubber prices after the peak tapping season begins in October, the near-term outlook for profit margins remains sensitive to commodity price fluctuations. The sustainability of demand, which has been robust due to recent policy shifts, will also be critical. Investors may watch for how these companies balance potential further price hikes with the need to maintain their volume growth momentum in an environment where consumers are sensitive to vehicle price changes.