Motilal Oswal expects India's auto sector to post strong Q2 FY27 revenue growth on healthy demand, but flags that elevated commodity costs could keep margins and earnings under pressure despite robust volumes. Given the strong volume growth, auto ancillaries in the brokerage coverage are expected to post ~21% revenue growth.
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Motilal Oswal Report
On the back of a healthy recovery in volumes, auto OEM companies under Motilal Oswal's coverage are expected to post a strong 31% YoY revenue growth. The brokerage expects two-wheelers OEMs to post ~26% revenue growth, followed by passenger vehicles OEMs at 30% and commercial vehicles OEMs at 39%.
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However, prices of key inputs have been on an uptrend since Q3 FY26, and despite the price hikes, there is likely to be some under-recovery due to the sharp increase in a short span, adds the brokerage.
Given the strong volume growth, auto ancillaries in the brokerage coverage are expected to post ~21% revenue growth. However, the surge in commodity prices and the lag mechanism for cost pass-through could result in relatively lower EBITDA/PAT growth of 8%/4% for auto ancillaries.
Mass-market tyre companies are likely to witness the sharpest margin contraction in Q2.
Motilal Oswal believes that the recent correction in stock prices across the sector has largely factored in the impact of commodity inflation on earnings. Underlying demand remains strong, and the brokerage believes regular price hikes will gradually offset the commodity inflation and help drive earnings in the medium term.
Any respite in commodity inflation should support earnings recovery and lead to a potential re-rating of the sector.
Marutim Suzuki, TVS Motor and Mahindra and Mahindra are Motilal Oswal's top pick among OEM while SPR Auto Technologies, Tenneco Clean Air India and HFL are among top picks in auto anicllaries.
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