Brokerage Nomura maintains a positive view on major Indian automakers, citing strong retail sales growth in September. However, analysts flagged rising raw material costs and a buildup in dealer inventory levels as key risks that could pressure profit margins in the coming months.
Brokerage firm Nomura has shared a positive outlook for the Indian automotive sector, highlighting strong retail performance in September across passenger and two-wheeler segments. The firm continues to favour companies like Mahindra & Mahindra, Hyundai Motor India, Ather Energy, TVS Motor, and Sona BLW Precision Forgings, noting that recent price increases by automakers have not significantly cooled consumer interest.
Strong Retail Momentum and Inventory Concerns
The industry saw healthy activity in September, with passenger vehicle dispatches to dealers rising 21% compared to the same period last year. Retail sales growth was even higher at 26%, suggesting that demand is currently outpacing production. However, this gap between factory dispatches and final sales has led to an increase in dealer inventory. Approximately 58,000 vehicles were added to stock levels in September. For investors, high inventory is a monitorable point, as it can strain dealer cash flow and may eventually force companies to offer discounts, which could squeeze profit margins.
The two-wheeler segment also displayed resilience, with retail demand surging by 35% year-on-year, even as factory dispatches rose by a more modest 6%. The electric vehicle segment continues to show rapid adoption, with sales jumping 87% year-on-year to reach approximately 205,500 units, a move the brokerage describes as an inflection point for the industry.
Rising Costs and Future Risks
While current demand remains strong, Nomura warned of structural challenges for the remainder of the 2027 fiscal year. Analysts expect growth to slow down in the second half of the year as the industry deals with a high-base effect from last year's performance. Furthermore, rising prices for raw materials like steel, copper, and crude oil are creating cost pressures.
Profit margins will likely depend on a company’s ability to pass these rising costs to customers. According to the analysis, commercial vehicle and two-wheeler manufacturers generally have better pricing power, meaning they can more easily raise prices to protect margins. Passenger vehicle makers, however, may face a more difficult environment if they attempt to raise prices further.
Meanwhile, the tractor segment has struggled, with volumes expected to fall by 21%. This decline is largely attributed to shifts in the festive season calendar and a challenging comparison against the strong performance recorded in the same period last year. Investors tracking this sector may want to watch dealer inventory levels, trends in commodity prices, and management commentary on margin stability in the upcoming quarterly results.