Auto Q1 Preview: Rare Earth Magnet Shortage, Sluggish Volumes and Discounts to Keep Earnings Growth in Slow Lane

The upcoming Q1 earnings season isn’t expected to deliver much cheer for the automobile sector. According to brokerages, a mix of persistent headwinds, including shortages of rare earth magnets, sluggish demand, and sustained discounting is likely to keep revenue growth for the sector marginal at best.

Volume growth remained weak through the June quarter, and while commodity costs stayed relatively subdued in some areas, discounts--particularly in the small car segment, continued to weigh on margins. These pressures are expected to result in lower single-digit revenue growth for the sector overall.

Tata Motors is seen as the biggest drag this quarter. Excluding it, Kotak Institutional Equities (KIE) estimates revenue growth of around 6% for the sector. But once Tata Motors is included, overall growth slips to just 1%. The company has been hit hard by slowing global auto demand, with its luxury arm Jaguar Land Rover taking a notable hit, affecting both its topline and margins.

Beyond revenue pressures, rising input costs are expected to further squeeze margins. Analysts at HDFC Securities note that higher raw material prices, especially for steel and platinum group metals, are likely to dent gross margins. Seasonal weakness in volumes is also expected to result in operating deleverage, putting added pressure on profitability. Factoring all of this in, KIE expects Ebitda margins for the sector to decline by 210 basis points year-on-year in Q1.

Nuvama Institutional Equities also flagged margin concerns, citing the uptick in commodity costs. That said, favourable currency movements could provide some relief for select companies. However, this comfort may be short-lived, as analysts at Nomura warn that rising discounts and increased advertising and promotional spend will likely keep pressure on margins for the rest of FY26 as well.

More worryingly, brokerages are turning cautious about growth in the coming quarters due to a growing shortage of rare earth magnets—a critical component in both electric and conventional vehicles. Though these magnets represent a small part of total vehicle cost, they are essential for producing EV motors and components like ignition coils, sensors, speedometers, and power steering systems.

Most of the world’s rare earth magnet processing is concentrated in China, where the process is both radioactive and costly. While India is exploring local production and increased imports from Japan, these are longer-term solutions. In the near term, importing fully assembled components from China could be a stop-gap measure, but this would increase costs, lower localisation levels, and risk eligibility under the government’s production-linked incentive (PLI) scheme. HDFC Securities notes that none of the Indian suppliers have secured approvals yet to import rare earth magnets directly from China, raising further concern for the industry.

Two-Wheelers May Hold Firmer Ground

While not immune to these challenges, the two-wheeler segment is expected to fare slightly better than passenger vehicles in Q1.

Bajaj Auto’s Ebitda is likely to remain flat year-on-year, as weaker pricing and higher input costs are offset by a favourable currency environment and a richer product mix. Hero MotoCorp may see a minor dip in profitability, while TVS Motor is expected to report robust EBITDA growth, driven by better operating leverage, strong product mix, and additional benefits from the PLI scheme.

Eicher Motors is also expected to post a modest 3–4% year-on-year Ebitda expansion, helped by 17% volume growth. However, the gains could be partially offset by higher marketing and advertising costs, as well as an unfavourable product and geographic mix.

Overall, the June quarter looks set to be another muted one for the auto sector. With a range of structural and supply-side challenges still in play, sustained growth may prove elusive, at least in the short term.