Auto sector Q1 results preview: Margin pressure looms despite strong demand; Hyundai, Tata Motors PV among top picks

The automobile sector is likely to post another quarter of strong revenue growth in Q1FY27, driven by robust demand across passenger vehicles, two-wheelers, commercial vehicles and tractors, along with an improved product mix. However, profitability is expected to remain under pressure due to rising commodity costs following the West Asia conflict, according to a Q1FY27 earnings preview report by Nuvama Institutional Equities.

The brokerage estimates aggregate revenue for its auto coverage universe (excluding Tata Motors' passenger vehicle business) to grow 22% year-on-year, while EBITDA is expected to rise only 10%, as higher raw material costs weigh on margins.

Passenger vehicles, two-wheelers to lead revenue growth

According to Nuvama, the domestic passenger vehicle (PV) industry recorded 26% year-on-year volume growth during the quarter, while exports increased 6%. Improved realisations, driven by a richer product mix and higher electrification, are expected to support revenues.

Among passenger vehicle manufacturers, Tata Motors' India PV business is expected to post the strongest revenue growth of 56%, followed by Maruti Suzuki at 37% and Mahindra & Mahindra's auto business at 20%. In contrast, Hyundai Motor India is likely to report a 2% decline in revenue.

Two-wheelers and commercial vehicles remain resilient

The brokerage expects the two-wheeler segment to remain a key growth driver, with domestic volumes rising 19% and exports jumping over 30% during the quarter. Strong demand, better realisations and favourable currency movements are expected to boost earnings.

Among OEMs, Bajaj Auto is projected to deliver 36% revenue growth, followed by TVS Motor at 35%, Hero MotoCorp at 30%, and Eicher Motors at 26%.

The commercial vehicle segment is also expected to remain healthy, with domestic volumes growing 19% on the back of replacement demand. Tata Motors CV is likely to report 22% revenue growth, while Ashok Leyland is expected to post 11% growth.

In the farm equipment segment, Escorts Kubota and Mahindra's farm business are expected to report revenue growth of 28% and 22%, respectively, aided by robust tractor demand.

Ancillaries to outperform, but margins under pressure

Nuvama expects auto ancillary companies to report healthy double-digit revenue growth, led by Sona BLW Precision Forgings (Sona Comstar), ASK Automotive, Samvardhana Motherson, and Minda Corporation.

However, companies such as Balkrishna Industries, Apollo Tyres, CEAT, and Exide Industries may underperform due to higher rubber and crude oil prices.

Commodity inflation to hit profitability

Despite healthy revenue growth, Nuvama expects earnings growth to remain muted as commodity prices continue to rise amid geopolitical tensions and elevated energy costs.

The brokerage expects ASK Automotive, Sona Comstar, Bajaj Auto, TVS Motor and Eicher Motors to report strong EBITDA growth.

On the other hand, Hyundai Motor India, Tata Motors, Apollo Tyres and SKF India are likely to witness a double-digit decline in EBITDA due to margin pressures.

Top stock picks

Despite near-term cost pressures, Nuvama Institutional Equities remains constructive on the automobile sector, citing sustained demand, a strong new product pipeline, supportive financing conditions, the upcoming pay commission benefits and government policy support.

The brokerage's top picks in the sector are Hyundai Motor India, Tata Motors PV, Eicher Motors, Samvardhana Motherson, and ASK Automotive.

Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.