The automotive sector is also feeling the impact of the ongoing Middle East conflict and the gas supply shortage as a result. Key brokerage house Axis Direct believes, though this could lead to minor disruption, the overall impact is expected to remain manageable in the near term. However, they don’t rule out price hikes.
In this scenario, what’s the right investment strategy for the auto sector? “We continue to favour companies with strong domestic exposure, healthy pricing power, and a favourable product mix, which offer relatively lower downside risk amid current market uncertainties,” Axis Direct said in its report.
Axis Direct’s top auto sector picks amid Middle East conflict
Axis Direct said Eicher Motors and TVS Motor are their top picks as they are expected to see a moderate impact from energy supply constraints. The brokerage has maintained a target price of Rs 8,060 for Eicher Motors, implying an upside of 16.71% from the current price. For TVS Motor, Axis Direct has set a target price of Rs 4,165, implying a 22.04% upside from the current price.
Axis Direct also noted that top automakers Maruti Suzuki, Ashok Leyland and Bajaj Auto are likely to have high impact. The brokerage, however, has a ‘Buy’ rating for all three stocks as they believe the impact is likely to be manageable in the near term as most automakers currently hold around three to five weeks of channel inventory.
“Since the issue is industry-wide, customers are generally expected to accommodate modest delivery delays rather than cancel vehicle orders,” the report noted.
CNG demand likely to stay strong despite gas supply curbs: Axis Direct
Axis Direct expects CNG vehicles to have the cost advantage compared with petrol or diesel models. It noted that the help came from the government’s move to prioritise gas allocation for CNG transport to ensure steady fuel availability at retail stations.
As a result, automakers with a strong CNG portfolio, such as Maruti Suzuki and Bajaj Auto, could continue to see healthy demand.
“As a result, while factories may face gas shortages affecting production schedules, consumer demand for CNG vehicles is likely to remain intact due to continued fuel availability and cost advantages compared with petrol or diesel vehicles.”
Manufacturing costs may rise 15–25% and impact margins
The report noted that the manufacturing costs may increase by about 15–25% if automakers shift from piped natural gas (PNG) to costlier alternatives such as spot LNG or other fuels because of the industrial gas supply restrictions.
“This rise in energy expenses could lead to EBITDA margin compression of around 80-100 bps in Q4FY26 for natural gas-dependent auto manufacturers,” Axis Direct noted.
Higher energy costs could also raise conversion costs across the auto component ecosystem, potentially leading to cost pass-through measures across the value chain.
Higher crude prices may force 0.5–1% hike in vehicle prices: Axis
Axis Direct also highlighted that cost of several raw materials used in vehicle manufacturing has increased because of higher crude oil prices. Crude is currently hovering near $110 per barrel due to Middle East conflict.
Inputs such as plastics, paint, synthetic rubber and tyres are crude derivatives and together account for about 3–7% of OEM revenues. Sustained increases in these input costs could prompt vehicle price hikes of around 0.5–1% across segments to protect profitability.
Gas shortages may disrupt auto component supply chain
Axis Direct further noted that auto component suppliers engaged in forging and casting are the most vulnerable to gas supply disruptions. These processes require high-temperature furnaces that depend heavily on gas.
Any disruption in their production could affect the supply of critical components to automakers and potentially create cascading supply chain issues, particularly in the commercial vehicle segment.
Conclusion
Axis Direct highlighted operations such as paint shops and forging processes in the auto sector depend heavily on gas-based heating, and any disruption in industrial gas supply could affect production across the ecosystem. Some original equipment manufacturers (OEMs) have already reported minor disruptions.
The brokerage house pointed out that investors should track the duration of gas supply disruptions, potential further restrictions on industrial gas allocation and the trajectory of crude oil prices amid Middle East conflict.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.