New Delhi [India], October 13 (ANI): India's automobile sector could see a shift in earnings leadership between FY26 and FY28 as rising raw material costs and slowing demand growth put pressure on profitability, according to a report by Systematix Institutional Equities.

It noted that FY27 could be a year of normalisation rather than a reversal, as the boost in vehicle sales from GST-related measures begins to moderate, while long-term demand drivers continue to evolve.

"We view FY27 as a year of normalization rather than reversal, as the GST-led volume boost moderates, while structural demand drivers continue to evolve," it said. 

The report said the sector is moving from a post-pandemic recovery in profit margins towards a phase where sustainable earnings growth will be the key focus. Automakers that maintain healthy sales volumes, protect margins and use capital efficiently are likely to be better positioned.

According to the report, companies with strong premium vehicle portfolios, new product launches, efficient operations, healthy balance sheets and better control over commodity costs are likely to deliver stronger earnings growth despite moderate sales growth.

The report also highlighted that stock performance has historically depended more on earnings growth, stable margins and efficient capital utilisation than on sales volumes alone.

"The next phase of the cycle is likely to hinge less on absolute volume growth and more on companies' abilities to translate growth into sustainable revenue, margin and APAT expansion," the report said.

Despite the expected slowdown in near-term growth, Systematix remained positive on the sector's long-term prospects. Continued investments in manufacturing capacity, new products, alternative powertrains, localisation, technology and exports are expected to create growth opportunities over the coming years.

However, rising raw material costs could put pressure on profit margins and affect demand for entry-level vehicles as automakers raise prices to offset higher costs.

The report noted that companies may retain some of these price increases even after commodity costs ease, which could help support margins and improve profitability.

It added that the impact of rising commodity prices would vary across automakers, depending on their raw material requirements, sourcing strategies, inventory cycles, negotiations with suppliers and cost-reduction measures.

Pricing power, product mix, operating leverage and consumer spending on discretionary purchases are also expected to influence earnings before interest, taxes, depreciation and amortisation (EBITDA) across companies.

"We therefore believe the current commodity cycle should be assessed at an individual OEM level rather than through a uniform commodity-to-margin sensitivity across the sector," the report said. (ANI)