Nomura warns that rising raw material costs may squeeze profit margins for Indian automakers in the second half of fiscal year 2027. Despite these pressures, the brokerage favors companies like Mahindra & Mahindra and Ather for their strong electric vehicle portfolios. Investors should watch for demand trends and commodity price changes as the sector moves past a high-base period.
The Indian automotive sector is entering a challenging phase as companies navigate rising costs and shifting demand trends. In a recent update, brokerage firm Nomura highlighted that elevated prices for commodities and metals are likely to put pressure on profit margins through the second half of the 2027 fiscal year. While the impact will vary across segments, the firm notes that many manufacturers have yet to fully pass these cost increases on to customers.
Impact of Commodity Costs on Automakers
Nomura expects commercial vehicle and tractor segments to face the most significant pressure on their profit margins in the coming months. In contrast, two-wheeler manufacturers appear to be in a better position to offset these costs through pricing actions. Meanwhile, passenger vehicle companies are facing a tougher environment; they must balance rising input costs against intense competition, which limits their ability to increase product prices without hurting sales volume.
The Shift Toward Electric Vehicles
Amidst these sector-wide challenges, the brokerage remains constructive on companies that have established a firm footing in the electric vehicle space. With EV adoption reaching approximately 7% for passenger vehicles and over 11% for two-wheelers in India, the transition is fundamentally changing the market. Mahindra & Mahindra and Ather Energy are identified as preferred picks, as their focus on competitive product pipelines helps them capture market share from traditional manufacturers who rely heavily on internal combustion engines.
Earnings Outlook and Sector Divergence
Investors may see a divergence in performance when companies announce their quarterly earnings. Analysts anticipate that Ather, TVS Motor, and Eicher Motors are well-positioned to potentially exceed market earnings estimates. On the other hand, there is a risk of weaker performance from others, such as Ashok Leyland and Tata Motors’ passenger vehicle division, which may fall short of expectations due to the prevailing sector pressures.
Looking at auto suppliers, the outlook also shows variety. Nomura highlights Sona Comstar, Bharat Forge, and Motherson as potential positive surprises. Conversely, Balkrishna Industries is noted as a company that might face disappointment compared to current market forecasts.
Risks to Consider
Beyond rising material costs, investors should monitor the risk of demand tapering. The automotive industry is moving past a high-base period, meaning year-on-year growth comparisons could become more difficult in the second half of the fiscal year. Additionally, competitive intensity remains high, which could continue to squeeze profit margins for those without strong brand positioning or differentiated technology. The primary next steps for investors will be to track upcoming company results, particularly commentary on margin recovery and the actual sales volume of electric vehicle models, which will provide a clearer picture of how well these companies can navigate the current environment.