Despite multiple headwinds, the automobile sector is expected to hit the fast lane of growth driven by a spurt in volume. The EBITDA margins, however, is expected to take a marginal hit due to increased input costs going forward, said analysts tracking the industry.

?Driven by a strong economic recovery, increase in availability of finance and new product launches by existing and global players entering the market, the volume growth is expected to continue. Besides, encouraging exports would support strong volume growth,? said an analyst with Motilal Oswal Securities. The volume guidance provided by automakers indicates a favourable environment for the current financial year, he added.

According to an analyst with Angel Broking, ?We estimate that the volumes to register CAGR of around 14% over FY10, aided by the improved economic environment for the sector. Over the longer term, comparatively low penetration levels, a healthy economic environment and favourable demographics supported by higher per-capita income levels are likely to help the auto companies in sustaining their topline growth.?

However, the industry expects to undergo certain multiple headwinds in the short-term. ?The auto industry will face headwinds in the short-run due to an increase in cost of ownership because of 2% higher excise duty and partial pass-through of cost inflation in emission-norm changes; an increase in cost of operations as fuel prices rose 15% to 22% in the past year; hardening monetary policy resulting in higher interest rates for automobiles; the impact of forex volatility as exposures are to multiple currencies and an increasing competitive pressure,? the analysts pointed out. Experts feel the increase in input costs and interest rates are anticipated headwinds that could impact volume and earnings growth of the sector. It is also expected that rising input costs to restrict profitability, despite positive view on demand, they added.

According to them, the EBITDA margins are expected to moderate, but would stay above historical average. The continued growth in volume will give the industry pricing power and support high operating leverage. Besides, leading companies have undertaken cost cuts and productivity improvement programmes, which would dilute the impact of raw material cost inflation, supporting higher margins.

Ramping up operations in tax-free zones like Uttaranchal would help to counter cost pressure through a lower tax burden.