Auto Sector Faces Near-Term Headwinds Despite Price Correction, Says HSBC

"Auto stock prices have fallen 10-30% over the past six months, largely due to commodity cost inflation and the Middle East conflict," the report said. "Hence, on consensus estimates valuations appear undemanding." However, HSBC cautions that risks remain. "We believe commodity price hikes are significant and the impact on demand from a macro slowdown or likely price hikes may surprise the market negatively in the near term."

While the research firm remains positive on the sector over the medium to long term, it warns of continued volatility ahead. "We like the auto space in the medium to long term, but are braced for some further volatility in the near term," the report noted. To assess risks, HSBC ran a downside sensitivity analysis on FY27/FY28 estimates. "We flex FY27/28 estimates for downside case sensitivity analysis and see valuations on the revised earnings as not so undemanding."

On the downside, HSBC assumes commodity prices will remain elevated and shave 100 bps off margins in FY27 and 50 bps in FY28, along with a 5% hit to volumes in FY27 due to a demand slowdown. "In this scenario, we assume commodity prices will remain high and affect margins by 100bps in FY27 and 50bps in FY28, and see a 5% hit to volumes in FY27 due to a demand slowdown."

Year-to-date in 2026, overall valuations have corrected sharply. "Overall valuations in YTD 2026 are down by almost 15% for passenger vehicle (PV) OEMs, 2-10% for 2W OEMs and 5-20% for commercial vehicle (CV) companies," the report said. Consensus EPS estimates tell a mixed story: "PVs are down by 2-18%, except for M&M (up c4%) despite tractor demand uncertainty, 2W are slightly up by 2-3% and CVs have seen increases of 10-30% over the same timeframe."

The key concern is that earnings cuts could still come through. "Our downside case scenario suggests a possible correction of 15-20% in earnings estimates, leaving limited head room in term of valuations," the report said. That implies that despite the recent correction, auto stocks may not offer much valuation cushion if commodity costs stay high and demand softens due to macro pressures or price hikes passed on to consumers.

The report flags two interlinked risks: input cost inflation driven by commodities and the Middle East conflict, and weaker domestic demand as the economy slows. The combination could pressure both margins and volumes, challenging the consensus view that valuations are now cheap.

For investors, the message is one of caution in the near term despite structural optimism. The sector's medium- to long-term drivers remain intact, but HSBC expects near-term earnings volatility and sees limited upside on revised estimates if the downside scenario plays out.

- ANI