Synopsis: The automobile and auto ancillary sector is undergoing short-term pressure due to rising energy costs and supply chain issues. While the demand is stable, the rising input costs and the possibility of production disruption could affect the margins by 80 to 100 basis points.
The Indian auto industry is witnessing steady demand, particularly in passenger vehicles and two-wheelers, supported by improving consumption trends. However, margin pressures remain due to rising costs and supply challenges. The latest update on the auto sector presents a mixed picture, with stable fuel supply aiding demand, while global uncertainties, higher energy prices, and raw material costs continue to impact profitability and pose production risks.
Energy Supply Disruptions
The ongoing tensions between the US and Iran have resulted in tighter gas supply. Many car manufacturers rely on gas as an input to some critical processes such as painting and metal forging. While the companies are currently holding inventories of 3–5 weeks supply, any prolonged disruption could soon impact production schedules.
Rising Manufacturing Costs & Raw Material Cost Pressure
Due to the lack of gas availability, companies may have to opt for higher-cost fuels such as LNG. This could result in increased manufacturing costs by as much as 15–25 percent and could also result in the reduction of EBITDA margins by as much as 80–100 points.
The increase in crude oil prices is also causing the price of raw materials to increase. Raw materials such as plastic, tyres, paint, and synthetic rubber make up between 3–7 percent of OEM revenues. To counter this, companies may have to raise the price of vehicles by as much as 0.5–1 percent. It may not be easy to raise the price by this much.
Supply Chain Risks Higher for Ancillaries & Logistics and Export Concerns
Supply chain risk remains a key concern, especially in forging and casting, where the company relies on tier-1 suppliers. These processes are highly energy-intensive, depending on continuous furnace operations and a stable natural gas supply. Any disruption in energy availability or gas supply constraints can significantly impact the production of critical components across multiple OEMs. Such disruptions can create cascading effects across the supply chain, particularly in the commercial vehicle segment where forged components are widely used.
On the export front, the impact remains relatively limited, with exports contributing around 15–20 percent of PV and 2W volumes, and 8 to 9 percent of M&HCV volumes in the Indian auto industry. However, indirect exposure exists through Middle East revenues derived from host OEMs, with companies like Ashok Leyland having a strong presence in the region. Geopolitical tensions around critical shipping routes such as the Strait of Hormuz could lead to higher logistics costs, increased insurance premiums, and delays in shipments, which may affect export profitability.
Near-Term Supply Challenges and Resilient Demand Outlook
Near-term production may face some pressure due to ongoing gas supply constraints, as forging and casting processes depend heavily on stable gas availability. Some OEMs have already started experiencing minor disruptions, which could increase if industrial gas allocations are tightened further.
However, the overall impact is expected to remain manageable in the short term, as most companies are maintaining 3–5 weeks of inventory, helping them absorb temporary supply issues. Since this challenge is industry-wide, customers are also likely to adjust to slightly longer delivery timelines rather than seeing major disruptions.
On the demand side, the outlook remains relatively strong, supported by the government’s continued push for CNG adoption. Despite the broader gas supply concerns, this policy focus benefits companies with a strong CNG portfolio, such as Maruti Suzuki and Bajaj Auto. While production schedules could see some impact due to gas shortages, consumer demand for CNG vehicles is expected to stay steady, driven by better fuel availability and cost advantages compared to petrol and diesel options.
Target Price Given by Axis Direct
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