New Delhi [India], June 2 (ANI): Demand across India's automobile sector is expected to remain broadly stable in the near term, but rising raw material costs are likely to squeeze profit margins of automakers during the first half of FY27, according to a sector update report by Kotak Institutional Equities.

The brokerage said the automobile industry delivered a strong performance in the March quarter of FY26, supported by healthy demand across segments and the benefits from recent policy measures.

'While we expect demand trends across most segments to remain steady in the near term, profitability trends will worsen during 1HFY27E,' Kotak Institutional Equities said in its report.

According to the report, original equipment manufacturers (OEMs) recorded strong volume growth during the quarter, led by two-wheelers, passenger vehicles, commercial vehicles and tractors.

'Overall, OEMs saw 22% yoy volume growth, led by strong 2W/PV/CV segments and tractors,' the report noted.

Kotak said the strong operating performance was aided by GST rate cuts, subsidies in the tractor segment, price increases undertaken by manufacturers and lower discounts across several vehicle categories.

The report added that domestic demand also supported growth for auto component makers and tyre companies despite weakness in overseas markets.

'Steady domestic demand across 2W/tractor/CV/PV... supported revenue growth for domestic suppliers, offset by sustained weakness in global auto markets,' the brokerage said.

However, the brokerage cautioned that rising commodity prices linked to the ongoing conflict in West Asia could put pressure on margins in the coming quarters.

According to the report, crude oil, rubber and aluminium prices have risen sharply from levels seen during the March quarter, while domestic steel prices remain elevated.

'The conflict in West Asia has caused a sharp rise in raw materials prices, primarily crude and aluminium prices,' the report said.

Kotak noted that higher input costs could affect profitability across passenger vehicle, commercial vehicle, two-wheeler and tractor manufacturers if current commodity prices persist.

The report also flagged concerns for the commercial vehicle segment, saying higher diesel prices could affect fleet operators' profitability and moderate industry growth.

'The increase in diesel prices--which accounts for 30-50% of fleet TCO--begets caution in the outlook on CV cycle,' it said.

While demand conditions remain stable, the brokerage maintained a cautious view on the sector due to the risk of margin pressure from rising raw material costs and geopolitical uncertainties. (ANI)