India’s Auto Sector Braces for Margin Squeeze as U.S-Iran Tensions Roil Energy Markets

Indian automakers are facing a sharp profitability dent in the final quarter of the fiscal year as escalating tensions between the U.S. and Iran trigger industrial gas shortages and a spike in raw material costs.

According to a sector update from Axis Securities, the Indian automobile industry is projected to see an EBITDA margin compression of 80 to 100 basis points for Q4FY26 (for manufacturers dependent on natural gas). The squeeze comes as tight energy supply forces manufacturers to shift from piped natural gas to costlier spot LNG or other fuels. This shift is estimated to drive manufacturing costs up by 15% to 25%.

Production Bottlenecks and the Inventory Buffer
The report identifies paint shops and forging operations as the primary friction points in the near term. These processes rely heavily on gas-based heating and face immediate disruption if industrial gas allocations are further curtailed by the government.

While some original equipment manufacturers (OEMs) are already reporting minor production hitches, the industry has a temporary safety net. Most companies are currently maintaining three to five weeks of channel inventory, which analysts believe will cushion the impact of short-term supply gaps. Furthermore, because the crisis is industry-wide, analysts expect consumers to tolerate modest delivery delays rather than cancel orders.

The CNG Paradox
A unique silver lining exists for manufacturers with heavy investments in compressed natural gas (CNG) technology, such as Maruti Suzuki and Bajaj Auto. While their factories may struggle with gas shortages, consumer demand for their vehicles is expected to remain resilient.

This is largely due to the Government of India’s policy of prioritizing gas for CNG transport, ensuring fuel remains available at retail stations even as industrial supply tightens. This preserves the total cost of ownership advantage for CNG buyers over petrol or diesel alternatives.

Input Costs and Price Hikes
Beyond gas, geopolitical volatility has driven crude oil prices higher, impacting key derivatives like plastics, synthetic rubber, and paints, which account for 3% to 7% of OEM revenues. To defend their bottom lines, manufacturers may be forced to implement price hikes of 0.5% to 1% across various vehicle segments.

The pain is not distributed evenly across the supply chain. Axis Securities identifies Maruti Suzuki, Ashok Leyland, and Bajaj Auto as “high impact” among the OEMs. Conversely, Eicher Motors and Escorts Kubota have been identified as “moderate” and “low impact,” respectively.

Likewise, on the auto component side, Sansera Engineering and CIE Automotive are among the high-impact companies, while Endurance Tech is slotted in the moderate-impact category. On the other hand, Uno Minda and Minda Corp are in the low-impact categories.

Shipping Risks and Export Exposure
While direct export exposure to the Middle East is relatively modest, accounting for roughly 15% to 20% of passenger vehicle and two-wheeler volumes and 8-9% in MHCVs, the threat to the Strait of Hormuz looms large. Any escalation in the region could significantly drive up global logistics costs and insurance premiums while delaying shipments for companies like Ashok Leyland, which maintains a strong presence in the GCC markets.

Way Forward
As the quarter progresses, automakers are closely monitoring the duration of gas disruptions and the trajectory of crude prices to determine if the sector can maintain its recovery momentum amid shifting geopolitical sands.