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Commodity costs remain elevated

For OEMs, driven by strong volume growth and improving mix, we expect revenue of our Auto OEM universe (ex-Tata Motors) to grow ~26% YoY/~9% QoQ in Q2FY27E.  Wholesale volumes for our covered OEMs increased ~30% YoY for PVs, ~19% for 2Ws and ~31% for CVs, while tractors were relatively weak, with M&M tractor volumes declining ~6% YoY. 

Demand remains healthy; 2H moderation remains a key concern: Demand momentum remained healthy in Q2FY27, supported by improved affordability and festive demand, although the focus is now shifting to sustainability of growth in 2HFY27, as a high base could moderate headline growth to single digits. On commodities, sequential pressure has eased in aluminum/lead/steel by 9%/4%/1% QoQ, while copper and rubber prices have increased 6%/9% QoQ respectively, although the commodity environment remains inflationary. Pricing actions by OEMs have remained calibrated and has not fully caught up with earlier commodity spike, which should keep margins under pressure in Q2/Q3FY27 despite strong volumes. Also, INR depreciation (~1% QoQ to INR 95.6) should provide some offset from margin compression for export-heavy 2W OEMs such as Bajaj Auto and TVS Motor through better export realizations. 

Pricing and mix aid ASPs; margins remain pressured : In PVs, we expect Maruti’s blended ASP to decline ~1-2% QoQ, as a ~3% negative model-mix impact from lower export contribution (~14% in Q2FY27 vs ~19% in Q1FY27) and lower Hyryder mix(~3.7% in Q2 vs. 5.2% in Q1) is only partly offset by ~1% pricing; However, domestic mix remains broadly stable, with Victoris+Grand Vitara+Fronx contribution improving to 21.0% in Q2FY27TD from 20.6% in Q1FY27. Hyundai ASP should improve ~1-2% QoQ, aided by higher Creta and export mix, while M&M UV ASP is likely to rise ~3% QoQ, largely reflecting ~2.7% price hikes and a higher EV/Scorpio mix. Tata Motors PV ASP should remain broadly flat QoQ, with weaker Sierra+Nexon (37.4% in Q2 vs. 42.1% in Q1FY27) mix offset by pricing.

Within 2Ws, ASP trends are relatively supportive: We expect TVS blended ASP to increase ~1-2% QoQ, supported by lower moped mix (7.7% in Q2 vs.8.6% in Q1) and a higher share of >125cc motorcycles in exports. Bajaj Auto ASP is likely to rise ~2-3% QoQ, aided by higher 3W and Chetak contribution, along with ~0.5% pricing/forex benefit, despite a weaker Pulsar mix (16.3% in Q2 vs 23.2% in Q1). Royal Enfield ASP should improve ~1% QoQ on higher export contribution, partly offset by weaker >350cc export mix, while Hero ASP is likely to rise ~1-2% QoQ, including ~1% pricing and a higher VIDA mix (4.4% in Q2 vs 3.4% in Q1). Within 2Ws, Bajaj Auto and TVS Motors are likely to see least QoQ margin compression led by price hikes, currency benefits and exports mix.

For auto ancillaries under our coverage, production growth remains healthy across most segments, with PV/CV/2W production growing ~25%/~25%/~17% YoY, respectively, while tractor production remained broadly flat YoY in Q2FY27. We expect revenue for our ancillary coverage universe to grow ~24% YoY/~6% QoQ, supported by healthy underlying production and content growth.  Tyre margins should remain broadly stable-to-lower QoQ, with Apollo/MRF down ~65bps/~44bps and CEAT broadly flat, as rubber costs remain elevated. Diversified ancillaries should see better sequential margins, aided by operating leverage and commodity pass-through.

Eicher Motors, TVS Motor and Maruti Suzuki, M&M are top picks within OEMs: Our top picks in Elara OEM universe are Eicher Motors, TVS Motor, Maruti Suzuki. 

Amongst ancillaries, our top picks are Gabriel India, Minda Corp, Sona BLW, Uno Minda as we prefer ancillaries which have multiple levers of growth such as a) increasing products, b) expansion in segments, c) expansion in geographies, and d) inorganic expansion.

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