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Aggregate auto demand for all OEMs in our coverage universe grew 23% YoY in 4QFY26. Segmental trends: 2W up 25%, PVs up 15%, CVs up 22%, and tractors up 33%.

However, rising input costs are likely to limit earnings growth. We expect our OEM coverage universe (ex TMPV) to post a much slower 9% YoY earnings growth in 4Q.

Auto ancillaries within our coverage universe are likely to post ~14% revenue growth and a much healthier EBITDA/PAT growth of 20%/23% in 4Q.

Earnings outperformers among OEMs (ex TMPV) include BJAUT (+30%), HMCL (+26%), TVSL (+18%), and MM (33%) YoY. HMIL is an underperformer, with PAT decline of 27%.

 In auto ancillaries, key outperformers in 4Q include CRAFTSMA (+54%), SAMIL (+30%) and all three mass-market tyre companies APTY (+45%), CEAT (+78%) and MRF (+41%). Key underperformer is BIL (10% PAT decline).

Outlook has turned cautious for the sector given the ongoing geopolitical headwinds, with the surge in input costs being the key monitorable. Resultantly, major EPS cuts were seen in CEAT (-22%), HMIL (-16%) and APTY (-14%).

Our top OEM picks are MSIL, TVSL and MM. Top auto ancillary picks are SAMIL, MSWIL and ENDU.

Demand remains healthy in 4Q across segments

Demand has continued to be encouraging across segments in 4Q as reflected in strong retail growth reported in Vahan. As a result, the overall auto industry volume growth for 4Q (aggregate for all listed OEMs under our coverage) stood at 23% YoY. More importantly, growth was driven by all segments: 2W up 25%, PVs up 15%, CVs up 22%, and tractors up 33%. In 2Ws, all OEMs, except RE, delivered 20%+ growth in 4Q, while RE posted 12% growth. In PVs, excl. HMIL, the other three listed OEMs posted healthy double-digit growth. HMIL underperformed peers with just 9% YoY volume growth in 4Q. Within CVs, TMCV outperformed with 25% growth in 4Q, while VECV and AL posted 17-18% growth each. Further, within tractors, MM posted 36% YoY growth and Escorts’ volumes grew 21% YoY.

Input cost pressure to hurt margins, severe impact likely to reflect in 1QFY27

On the back of a healthy recovery in volumes, auto OEM companies under our coverage (ex TMPV) are expected to post a strong 19% revenue growth. However, prices of key inputs have been on an uptrend in 4Q. While most OEMs are likely to see cost pressures in 4Q, bulk of the impact of this rise is likely to be visible in 1Q given that most OEMs would have long-term contracts in place. Aggregate EBITDA margin for our OEM coverage universe (ex TMPV) is estimated to decline by 20bp YoY to 14.1%. In 4Q, we expect PV players like MSIL and HMIL to see margin pressure on a QoQ basis. Similarly, in 2Ws, we expect HMCL and Eicher (RE) to see relative margin pressure compared to peers like BJAUT and TVSL, for whom favorable currency is likely to be the offsetting factor. For CVs, we expect strong operating leverage benefits to be capped due to a rise in input costs. Overall, on the back of healthy volume growth, we expect OEM companies (ex TMPV) under our coverage to record 17%/9% YoY growth in EBITDA/PAT in 4Q.

Given the strong OE growth, auto ancillaries in our coverage universe are expected to post ~14% revenue growth. This is likely to lead to a much better 20%/23% growth in EBITDA/PAT for 4Q. Among auto ancillaries, BIL is among the worst impacted, as it is likely to see a margin contraction of 290bp YoY due to weak demand and increased freight costs. On the other hand, many auto component players are likely to see margin improvement on YoY basis, such as HAPPY (+140bp), CRAFTSMA (+80bp), MOTHERSO (+110bp), TII (+140bp) and all mass-market tyre companies – APOLLO, CEAT and MRF.

Estimated hits and misses in 4QFY26

We expect our auto OEM coverage universe (ex TMPV) to post 9% YoY growth in earnings. Within 2Ws, BJAUT (+30%), HMCL (+26%) and TVSL (+18%) are expected to post healthy earnings growth on the back of strong volume growth. In PVs, MM earnings growth is likely to be strong at 33% YoY. Within OEMs, apart from TMPV, HMIL is likely to be the worst impacted and is expected to post 27% earnings decline in 4Q.

As highlighted above, our ancillary coverage universe is also expected to deliver healthy 23% YoY growth in earnings. All auto ancillary companies in our coverage universe are expected to post healthy double-digit growth, except BIL. We expect BIL to post 10% earnings decline due to margin pressure. Key outperformers in 4Q are likely to be CRAFTSMA (+54%) and SAMIL (+30%) apart from all the mass market tyre companies under coverage like APTY (+45%), CEAT (+78%) and MRF (+41%). However, one needs to note that rising input costs are likely to materially impact tyre companies margins from Q1 onwards.

Outlook turns cautious due to geopolitical headwinds

While demand momentum has remained healthy in 4Q, there are clear headwinds emerging for the sector given the ongoing geopolitical turmoil in West Asia. While most of the large companies (both OEMs and Ancs) are managing gas supplies at their end very well so far (as well as their supply chain), there is no certainty that they would continue to do so in the coming months if this situation persists. Beyond this, the most critical parameter to watch out for is the surge in input costs across all commodities in 4Q, which could materially impact earnings from 1Q onwards. Further, the surge in crude oil prices remains a key risk to India’s economic growth, which is likely to be detrimental for CV outlook. Even freight costs have increased for export-focused companies. This has led to reasonable earnings cuts for our coverage universe, more so for FY27E than FY28E. Here also, we do expect input costs to stabilize at lower levels in the second half of the fiscal. Major earnings cuts (ex TMPV) were seen in CEAT (-22%), HMIL (-16%) and APTY (-14%).

Given these headwinds, the auto universe has seen a sharp derating over the last month or so. OEMs seem to have seen a higher derating than auto ancillaries. In these circumstances, companies with strong fundamentals that have a healthy launch pipeline and the ability to outperform peers and/or are attractively valued will remain preferred bets. Our top OEM picks are MSIL, TVSL and MM. Among auto ancs, our top picks are MSWIL, SAMIL and Endurance.

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