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HDFC Securities Institutional Equities
Geopolitical tensions lead to uncertainty in the near term
Just when most of the ingredients were in place for decent sustainable growth in the medium term for the auto industry, uncertainties started to build up, which would most likely impact the near term and thus the earnings potential of FY27.
The challenges are both on the demand and supply side. The supply side is at risk of timely availability of raw material, fuel, and labour for manufacturing, while demand-side risks include impending price hikes, impending fuel price hike, probable higher core inflation, and probable higher interest rates.
A similar situation in most other global markets too dampens the exports potential of key Indian auto companies. There has also been a substantial increase in SIPs and investments in equity mutual funds over the last few years, and considering the currently volatile stock market, it is likely to dampen the discretionary purchase sentiment of these consumers.
Additionally, early forecasts by weather experts of an El Nino during the monsoon of 2026 could further dampen demand. Hence, the brokerage sees a risk to the earnings potential in FY27, though expect normalisation in FY28 as a base case, as we expect a realigning of the global supply chains and cooling off of the currently heightened geopolitical tensions to put India back on the path of higher growth with manageable inflation.
Q4 earnings to be impacted by cost inflation of RM, production, and freight
For Q4, despite a 3% QoQ expected increase in revenue for the brokerage's coverage universe (excluding of Tata Motors and Tata Motors PV), HDFC Securities expects a ~40bps QoQ contraction in margin due to the impact of higher raw material costs, production costs, and freight costs (ocean freight costs were up ~15% QoQ).
It also expects other income to be lower due to negative mark to market impacts.
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