Leading motorbike maker Hero Honda Motors Ltd and top utility vehicle and tractor maker Mahindra & Mahindra are forecast to post gains on modest sales increases and a product mix that favours high-end vehicles with healthier margins.

But the rest, including No. 1 vehicle maker Tata Motors, are set to post declines, analysts said.

"Concerns over higher input costs, volatility in foreign currency exchange rates and higher interest rates pose sizeable risks," said Amit Kasat at Motilal Oswal Securities.

Vehicle makers in Asia's third-largest economy have seen demand for motorbikes, cars and trucks soar in recent years on the back of higher incomes and an economy that has grown at an average rate of 8.75 per cent in the last four years.

But higher costs of raw materials such as steel, and rising interest rates aimed at checking inflation hovering at 13-year highs, have bumped up vehicle loan rates by 200-300 basis points and depressed demand.

A fuel price hike in June of 10 per cent, the biggest increase this decade, has further crimped consumer spending and delayed vehicle purchases.

"As most suppliers' contracts are renewed in the first quarter, we estimate operating margins to continue to be under pressure," said Vaishali Jajoo at Angel Broking.

NANO EFFECT

Sales of small cars, motorbikes, three-wheeled motorised rickshaws and light trucks rose slightly in the June quarter, helped by an excise duty cut in in the federal budget at end-February.

Vehicle makers have also raised prices by up to 3.5 per cent, although that has been partly offset by an increase in excise rates for premium vehicles and SUVs.

Still, a weaker rupee, which fell by nearly 7 per cent against the dollar in the June quarter, is helping boost earnings from exports. New launches of bikes and cars, and stricter emissions and safety rules are also expected to boost longer-term demand.

Passenger vehicle sales, forecast to hit more than 2 million units a year by 2010, grew 12 per cent to 1.55 million units in 2007/08. Sales grew by a third the previous year.

The sector is expected to receive a boost from the launch of Tata's Nano, the world's cheapest car, later this year.

The Nano, which will be priced at above 100,000 rupees ($2,300), is likely to grab share from top car maker Maruti Suzuki, and shift some motorbike users to cars.

Tata Motors, which recently completed the $2.3 billion acquisition of Ford Motor Co's Jaguar and Land Rover brands, is forecast to post a 31 per cent decline in net profit to 3.21 billion rupees ($74 million) on account of higher interest charges and depreciation.

The outlook for commercial vehicle sales, which grew 4 per cent in 2007/08, down from a 33 per cent expansion in the previous year, remains bleak because of high interest rates and fuel prices.

Sales of motorbikes, which fell 8 per cent in 2007/08 from an 11 per cent growth, may tick up on new launches.

Hero Honda, in which Japan's Honda Motor controls 26 per cent, is forecast to post a 35 per cent rise in net profit to 2.56 billion rupees, helped by sales of more premium bikes and benefits from a new plant in northern India.