Raw material costs may squeeze auto makers' margins in FY27-28, says brokerage report
A Systematix Institutional Equities report says rising input prices and a possible demand slowdown could pressure vehicle makers' profits between FY26 and FY28.
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The Indian automobile sector could see big shifts in earnings in the coming financial years, according to a report by Systematix Institutional Equities. The report says the earnings picture for vehicle makers may change between FY26 and FY28. Rising raw material prices and a possible slowdown in vehicle demand could put pressure on company profits. Selling more vehicles alone will therefore not be enough for companies; protecting profit will matter just as much.
According to the report, FY27 may prove to be a period of normalisation rather than a year of big upheaval. The momentum that GST-related measures gave to vehicle sales may fade gradually. At the same time, customers' purchasing power, demand for new models and vehicle prices could affect the whole industry. A company's success will therefore not be decided by sales figures alone; how much profit the sales deliver will also be looked at.
The report says companies that have a strong range of premium vehicles, are launching new models, have efficient production systems and have a strong financial footing could benefit in this environment. By keeping raw material costs under control and using capital well, companies can improve their earnings even with moderate sales growth.
On the other hand, if prices of steel, aluminium and other industrial raw materials rise, the cost of producing vehicles could go up. Companies may raise vehicle prices to make up for the extra cost. However, higher prices are feared to hurt demand, especially for entry-level vehicles. Even if raw material prices fall later, companies may hold on to some of the higher prices, which could support their profits.
The report also says raw material prices will not affect every vehicle maker in the same way. That will depend on which raw materials a company uses, its agreements with suppliers, how much stock it holds and how far it can cut costs. Vehicle sales, operating margins and efficient use of capital will also be important factors.
Over the long term, the report is positive on the Indian auto sector. Investment in new production facilities, electric and other alternative powertrains, local production, technology and exports could create growth opportunities down the line. In FY27-28, investors will therefore watch which companies can keep costs under control and grow profits in a sustainable way.
