The Indian auto sector just reported its strongest quarter ever by volume. Industry dispatches across passenger vehicles, two-wheelers, and commercial vehicles all touched new highs in the April-June quarter. But behind the celebratory sales numbers, a different story is playing out in the financials — one where the cost of going electric is quietly redrawing the sector's profitability map.

Record sales, shrinking margins

Maruti Suzuki, India's largest carmaker by volume, sold 2.42 million vehicles in FY26, an 8.4% increase over the previous year. Revenue jumped 20.2% to Rs 1.74 lakh crore. But operating EBITDA margins fell 160 basis points — from 13.9% to 12.3% — per their FY26 investor presentation. The culprit: material costs rose from 73.8% to 75.9% of net sales, a 210 basis-point swing driven by adverse commodity prices and new model development expenses.

Maruti isn't alone. The pattern repeats across the sector — volumes up, margins under pressure. With Bajaj Auto, Dr Reddy's, and over 250 companies reporting Q1 FY27 results this week, investors should look beyond the topline cheers.

The company that cracked the EV margin code

Bajaj Auto stands in sharp contrast. In Q4 FY26, the company crossed Rs 16,000 crore in quarterly revenue for the first time, with EBITDA at Rs 3,300 crore and margins at a robust 20.8%, per their Q4 FY26 board outcome filing. Total volumes hit a record 13.7 lakh units, up 24% year-on-year. For the full year, revenue breached Rs 50,000 crore and EBITDA crossed Rs 10,000 crore — both firsts.

Critically, Bajaj's electric business is now profitable. Per their Q3 FY26 earnings transcript, both the electric scooter (Chetak) and electric auto segments crossed Rs 1,000 crore of quarterly revenue each for the first time. Management noted that "the EV business now delivers double-digit EBITDA margin while improving unit economics as the portfolio continues to scale." This makes Bajaj one of the rare Indian OEMs where electrification is additive to margins, not a drag.

M&M: EBITDA positive, but the depreciation bill looms

Mahindra & Mahindra has a more nuanced EV story. Per their Q4 FY25 investor presentation, M&M's combined BEV business (MEAL subsidiary plus e-SUV contract manufacturing) reported revenue of Rs 2,196 crore in Q4 FY25, with EBITDA turning positive at Rs 22 crore — its first quarter of operations. The company declared this a milestone: "BEV: EBITDA positive in first quarter of operations."

But PBIT (profit before interest and tax) remained negative at -7.5%, weighed down by heavy depreciation on new EV manufacturing capacity. M&M's auto standalone PBIT margin improved to 10.0% in Q1 FY26 excluding e-SUV contract manufacturing — but including it, the margin looks notably thinner. E-SUV penetration within M&M's volumes surged from 0.6% in Q1 FY25 to 7.8% in Q1 FY26, meaning the dilutive effect on blended margins will only grow as EV volumes scale.

The pure-play EV paradox: volume up, losses persist

Ather Energy, the pure-play electric two-wheeler company, illustrates the EV profitability challenge most starkly. Per their FY25 annual report, Ather sold 155,394 vehicles — a 42% jump over the previous year — and revenue grew 29% to Rs 2,255 crore. Adjusted gross margins improved dramatically from 9% to 19%.

Yet EBITDA remained deeply negative at -Rs 531 crore, a margin of -23%. That's better than the -36% of FY24, but still a long way from breakeven. Annual losses stood at Rs 812 crore. Ather's trajectory shows that even with sharp volume growth and improving unit economics, EV-only players face a multi-year runway to profitability.

Hero MotoCorp: the margin drag is visible

Even Hero MotoCorp, India's largest two-wheeler maker, has flagged the EV margin impact. In a board outcome filing, the company disclosed that its EBITDA margin for the ICE (internal combustion engine) business stood at 14.5%, but including the EV business, the reported margin dropped to 13.8%. As Hero scales its electric portfolio — the Vida brand — this gap will widen before it narrows.

Why this matters for Q1 FY27

As 250+ companies report results this week, the auto sector's headline numbers will look excellent. But the real signal for investors is in the margin mix. Companies that have achieved EV profitability (like Bajaj Auto) can grow without eroding returns. Companies still investing in electrification (M&M, Hero, Ather) face a period where every percentage point of EV penetration compresses blended margins.

The market has been pricing auto stocks on sales momentum. But with M&M's own analyst presentation revealing that "BEV products on rupees per vehicle basis may have similar net vehicle margin as ICE products on a matured basis — however, on percentage terms, it will always be lower due to higher denominator," investors should be calibrating expectations for structurally lower margins in an electrified future.

What retail investors should do

Don't be swayed by record volume headlines alone. When reading Q1 FY27 auto results this week, look for three things: (1) the gap between reported EBITDA margin and ICE-only margin — this tells you the true EV drag; (2) whether EV revenue per unit is rising (a sign of improving mix and less discounting); and (3) commodity cost as a percentage of revenue, which drove Maruti's 160 bps margin compression in FY26. Bajaj Auto's ability to deliver 20%+ margins with a profitable EV business makes it the benchmark. Companies that can't show a path to EV breakeven within two to three years risk becoming volume stories with shrinking profitability.

Data sourced from company filings on NSE via Xaro.