How Rising Steel Costs and Volume Trends Are Reshaping the Auto Sector Outlook?
About the Current Auto Sector Backdrop
The auto sector enters the new phase of the market cycle at a delicate inflection point. After a strong period of volume recovery supported by GST-led incentives and pent-up demand, cost pressures are once again moving to the forefront. Brokerage commentary from UBS and GS highlights a dual narrative unfolding simultaneously: demand momentum remains supportive, but input cost inflation, especially from steel and precious metals, is emerging as a key swing factor for margins.
This combination makes the upcoming quarters particularly important for interpretation rather than extrapolation. Investors and traders alike are now focused less on headline volume growth and more on how original equipment manufacturers manage cost pass-through, product mix, and operating leverage.
Autos are inherently cyclical, but they are also structurally evolving. Electrification, premiumisation, and export diversification have changed how markets evaluate the sector. Against this backdrop, understanding segment-wise sensitivity to input costs becomes critical to separating resilient players from those exposed to margin compression.
UBS View: Cost Pressures Take Centre Stage
🔹 Expected steel price hikes could further pressure auto company margins.
🔹 Rising precious metal costs add to the cumulative input burden.
🔹 Management commentary during Q3FY26 earnings will be closely tracked.
🔹 Margin impact varies meaningfully across auto sub-segments.
🔹 Clarity on cost pass-through will influence near-term stock performance.
Steel remains one of the most significant raw materials for the auto industry, and UBS highlights that expected steel price hikes could materially impact profitability. This concern is amplified by simultaneous inflation in precious metals, which affects components such as catalytic converters and electronics.
However, the impact is not uniform. The degree of exposure depends heavily on the segment in which a company operates. Commercial vehicle manufacturers face the highest sensitivity, while two-wheeler makers are relatively insulated. This dispersion creates opportunities for selective positioning rather than blanket sector calls.
Segment-wise steel cost exposure as a percentage of net sales provides a useful framework. Commercial vehicles carry approximately one-fifth of net sales exposure to steel costs, making them the most vulnerable during periods of sharp price hikes. Passenger vehicles sit in the middle, while two-wheelers remain the least exposed.
This structural difference explains why market reactions to steel price movements are often uneven across auto stocks. Investors who contextualise these moves within a broader Nifty Tip framework tend to avoid overgeneralisation during volatile phases.
Steel Cost Exposure Across Auto Segments
| Segment | Steel Cost as % of Net Sales | Margin Sensitivity |
|---|---|---|
| Commercial Vehicles | ~20% | High |
| Passenger Cars | ~10% | Moderate |
| Two-Wheelers | ~5–7% | Low |
These numbers are not merely academic. They directly influence pricing strategy, discounting behaviour, and the ability to sustain margins during cost inflation cycles. Companies with strong brand equity and differentiated products are better placed to pass on costs, while others may have to absorb a portion, impacting profitability.
The upcoming Q3FY26 earnings season is therefore expected to be more about commentary than numbers. UBS expects management teams to provide clearer guidance on how they plan to manage steel and precious metal inflation, whether through price hikes, cost optimisation, or supplier renegotiations.
Strengths🔹 Demand recovery remains visible. 🔹 Segment-wise diversification within the sector. 🔹 Strong players retain pricing power. 🔹 Export opportunities add optionality. |
Weaknesses🔹 Rising steel and precious metal costs. 🔹 Margin pressure risk in CVs. 🔹 Sensitivity to commodity volatility. |
While UBS focuses on costs, GS brings attention to the volume side of the equation. Post GST cuts, volume growth across two-wheelers and cars has been robust, indicating that price incentives and deferred demand have worked effectively. This volume momentum has helped offset cost pressures to some extent.
However, GS also cautions that current growth rates are elevated due to base effects and policy-induced demand pull-forward. As these effects normalise, volume growth is expected to moderate, especially in the fourth quarter of FY26.
The divergence between cars and two-wheelers is particularly noteworthy. Cars continue to outperform, reflecting a shift toward premiumisation and aspirational consumption, while two-wheelers show relatively slower growth as affordability pressures persist.
Opportunities🔹 Premium car demand resilience. 🔹 Export-led growth avenues. 🔹 Operating leverage benefits. |
Threats🔹 Volume moderation in FY26. 🔹 Inability to pass on costs. 🔹 Commodity-led sentiment swings. |
Commercial vehicle volumes are another area where moderation is expected. GS indicates that CV growth could cool toward mid-single digits in the March 2026 quarter. This is consistent with the historical pattern where infrastructure-led demand stabilises after a strong upcycle.
For investors, this implies a shift from chasing cyclical peaks to identifying companies with sustainable earnings profiles. In such phases, stock selection becomes more important than sector allocation.
From a market structure perspective, autos continue to play a meaningful role in index behaviour. Their weight in both Nifty and Bank Nifty-linked derivatives means that sector sentiment often spills over into broader market moves. Aligning trades with structured tools such as a BankNifty Tip framework can help manage this correlation risk.
Valuation and Investment View
Valuations across the auto sector remain mixed. Market leaders with strong brands and diversified revenue streams continue to command premium multiples, while others trade closer to historical averages due to margin uncertainty.
The next leg of re-rating will depend less on volumes and more on margin stability and guidance clarity. Companies that demonstrate effective cost management and disciplined capital allocation are likely to outperform as the cycle matures.
Investors focusing on tactical opportunities may find structured entry points using a Nifty Tip approach helpful in navigating near-term volatility.
Investor Takeaway
Derivative Pro & Nifty Expert Gulshan Khera, CFP®, believes that the auto sector is transitioning from a volume-led recovery phase to a margin-discipline phase. Investors should prioritise companies with pricing power, balanced cost structures, and clear strategic communication rather than chasing headline growth. A structured, sector-aware approach enables better risk-adjusted outcomes over the cycle. More informed analysis and guidance is available at Indian-Share-Tips.com, which is a SEBI Registered Advisory Services.
Related Queries on Auto Sector Outlook
How Will Steel Price Hikes Impact Auto Margins?
Which Auto Segments Are Most Cost Sensitive?
Will Volume Growth Sustain After GST Benefits Fade?
Are Auto Stocks Still Attractive in FY26?
How to Trade Auto Stocks During Commodity Volatility?
SEBI Disclaimer: The information provided in this post is for informational purposes only and should not be construed as investment advice. Readers must perform their own due diligence and consult a registered investment advisor before making any investment decisions. The views expressed are general in nature and may not suit individual investment objectives or financial situations.
