According to a report from HSBC Global Research, the automotive industry is likely to encounter significant short-term obstacles due to increasing raw material expenses and a possible dip in local consumer interest, despite vehicle company shares dropping by 10-30% in the last half-year.
The analysis points out that these share value reductions stem mainly from higher input costs and geopolitical tensions in the Middle East. It notes that current market valuations seem reasonable based on standard projections. However, the firm advises caution, stating that substantial increases in raw material prices, combined with potential economic deceleration or resulting price adjustments, could lead to unexpected negative effects on market sentiment soon.
HSBC maintains an optimistic outlook for the sector in the medium to long term but anticipates ongoing fluctuations in the immediate future. To evaluate potential downsides, the report conducted a sensitivity test on projections for fiscal years 2027 and 2028, revealing that adjusted earnings might not provide as much value as initially thought.
In this pessimistic scenario, the firm projects persistently high raw material costs reducing profit margins by 100 basis points in fiscal 2027 and 50 basis points in 2028, alongside a 5% decline in sales volumes in 2027 from weakened demand.
So far in 2026, market values have decreased notably: passenger vehicle manufacturers by about 15%, two-wheeler producers by 2-10%, and commercial vehicle firms by 5-20%. Standard earnings forecasts vary, with passenger vehicles down 2-18% except for one company showing a slight increase despite uncertainties in related areas, two-wheelers up marginally by 2-3%, and commercial vehicles rising 10-30%.
A major worry is the possibility of further reductions in earnings estimates. The downside projection indicates a potential 15-20% cut in forecasts, offering little buffer in valuations. This suggests that even after recent drops, automotive shares might lack sufficient protection if input costs remain elevated and demand weakens from broader economic factors or transferred price increases.
The report identifies two connected threats: rising costs from raw materials and regional conflicts, plus softening local demand amid economic slowdown. Together, these could strain both profitability and sales, questioning the idea that current valuations represent a bargain.
