Auto cycles, EV sparks & IT shifts: Kumar Rakesh decodes FY26's investment gears
Kumar Rakesh
, Analyst – IT and Auto at BNP Paribas, shares his outlook on key trends shaping the auto and IT sectors as we head into FY26. He believes the passenger vehicle segment has likely bottomed out and is poised for a gradual recovery, supported by stabilising affordability and potential policy catalysts.
Two-wheeler growth, however, may remain subdued amid tighter financing. In IT, Rakesh sees improved
valuations
and strong relative earnings
growth
making the sector attractive despite global uncertainties. He also highlights growing
EV
adoption—particularly in two-wheelers—as a key theme, supported by upcoming product launches and policy incentives.
Let's start with the pulse of the auto sector. Where are we in the auto industry cycle, especially when it comes to 2-wheelers and 4-wheelers?
We see the passenger vehicle industry to have troughed and expect a gradual growth recovery in the coming years. The last two years' growth slowdown was driven by a high base that was created post Covid by pent-up demand, and a sharp fall in affordability. While the base is normalised, our affordability index is showing that passenger vehicle affordability has largely stabilised over the last year, after having fallen considerably in the prior years. The catalyst to drive this growth recovery would be tax cuts announced in the recent budget and implementation of Eighth Pay Commission in 2026, apart from the stable affordability.
For the 2W-industry, we expect the growth slowdown to continue in FY26. We have seen a sharp growth moderation in the recent months which we believe was driven by tighter financing availability. The industry had started seeing an increase in two-wheeler delinquencies resulting in a higher credit cost for the financial institutions. We have noticed a lot of the captive financing entities of the two-wheeler companies, NBFCs and MFIs, to have slowed down their disbursements in the second half of FY25 to control the rising credit cost. In the coming quarters, while we expect the credit quality to improve resulting in an improved financing availability, the industry growth may still be single digit in absence of a buoyant financing that the industry had enjoyed over the recent years.
Live Events
EVs have dominated the headlines, but the numbers still show ICE vehicles holding strong. Are we witnessing a long transition phase, or is the EV narrative running ahead of itself?
In the passenger vehicle industry, EV penetration has been around 2% for some time, which we believe is partly a reflection of leading automotive OEMs' absence from the EV market. As they launch their EV models in the coming years, we expect the EV penetration among passenger vehicles to rise. Globally, we have noticed hybrid penetration outperforming EV penetration in recent years. As more hybrid models get launched, we could see a similar trend playing out in India as well.
In the two-wheeler industry, despite lowering of demand incentives in recent years, EV penetration has continued to rise. While demand could show monthly volatility as it adjusts to changes in incentives, we believe two-wheeler customers now well understand the value proposition of EVs and we should see a structural increase in its adoption. However, for an accelerated adoption of EVs in the two-wheeler industry, we would need to see commuter and executive motorcycles also getting electrified, which currently looks like a few years away.
How do you think India-UK FTA will impact some of our listed players?
Most automotive manufacturing plants in the UK are of premium and luxury brands. Hence, we do not see any material impact to India-listed passenger vehicle OEMs. That said, we could see a slightly higher number of premium/luxury vehicles selling in India, which are currently miniscule.
In the IT space, do you think the recent bounce in stocks has enough steam left as the Trump administration is working out trade truce agreements with major economies?
We believe we are past the trough of negative news cycle related to tariffs and counter tariffs. The economic impact of these announcements are yet to fully reflect. While that is a near-term risk, the year-to-date correction in the Indian IT Services' companies' valuations has brought down their premium over Nifty50's valuation to one of the lowest levels in the last five years. However, their one-year forward earnings growth outperformance over that of
Nifty
is now the highest that we have seen in almost a decade. Also, the sector is trading at close to the highest dividend yield in the last decade (outside of Covid period) creating a valuation backstop. Hence, in a scenario where the US macroeconomy goes through a shallow recession and then recovers by early 2026, risk-reward balance in the Indian IT services stocks looks favourable to us.
Several mid-cap IT names have outperformed the biggies lately. Is this a structural re-rating?
This is a trend we have seen particularly post Covid. We believe the growth of some of the midcap IT services companies have structurally improved in the recent years. Part of the reason is enterprises breaking down large contracts in smaller projects in which midcap companies can also now participate unlike earlier. This has resulted in an increase in the addressable market for midcap IT services companies driving their growth higher. Also, some of the enterprises now prefer to bring in a good quality mid-cap IT services company as a challenger to their large-cap IT vendor, both for cost reasons as well as technological innovations.
If you had to pick a theme to watch in FY26—AI monetization in IT or EV adoption in autos—what would you bet on?
AI monetisation may not translate to higher revenue for IT services companies in FY26 due to macroeconomic uncertainty and cost constraints on enterprise customers. However, in EVs, we will see 1) leading passenger vehicle OEMs launching and ramping-up their BEV models, 2) multiple new EV model launches across two-wheeler OEMs and network expansion, especially post the recent listing of major EV two-wheeler start-ups, and 3) first full year of PLI incentives for EVs being available. Hence, we would expect EV adoption to continue to gain traction in FY26 and to be a key theme in the year.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Economic Times
39 minutes ago
- Economic Times
Bajaj Finance shares jump 5% after RBI cuts repo rate by 50 bps, CRR by 100 bps
Shares of Bajaj Finance jumped 5.5% to hit an intraday high of Rs 9,425.5 on the BSE in Friday's trade, as the Reserve Bank of India's 50 basis point repo rate cut and 100 basis point CRR cut sparked broad optimism in the lending sector, especially among non-banking financial companies (NBFCs). ADVERTISEMENT While the aggressive repo rate cut is expected to weigh on net interest margins (NIMs) for banks in the near term, the RBI's simultaneous move to reduce the Cash Reserve Ratio (CRR) by 100 bps, unlocking Rs 2.5 lakh crore of liquidity, has emerged as a game-changer for the credit ecosystem. For NBFCs like Bajaj Finance, which rely on borrowing from banks and capital markets to fund lending, this dual move of easing both rates and liquidity is expected to lower funding costs and support loan growth. Analysts noted that NBFCs stand to benefit disproportionately from the rate cut as falling interest rates reduce borrowing costs, enabling lenders to offer more competitive loan products and expand their credit books. Also read: RBI's bazooka sends Sensex, Nifty soaring. What does it mean for stock market investors 'This move is likely to enhance liquidity in the system, making borrowing cheaper and encouraging companies to pursue capital expenditure,' said Divam Sharma, Founder of Green Portfolio PMS. 'With FPI inflows slowing down, this infusion of liquidity is a timely and welcome move.' ADVERTISEMENT According to Arsh Mogre, Economist at PL Capital, 'By lowering both the price (repo) and quantity (CRR) of money, the RBI has flattened the transmission curve. The CRR cut in particular offsets short-term pressures on margins from falling lending rates.'For a lender like Bajaj Finance, improved liquidity and falling interest rates are likely to aid credit disbursal, support margins, and revive consumption-led demand, especially in retail and SME segments. ADVERTISEMENT 'Tailwinds for NIMs from improving systemic liquidity and deposit rate cuts are visible,' said Naveen Kulkarni, CIO at Axis Securities he said, even as H1FY26 will see a more pronounced impact of the rate cut on NIMs, some respite is expected over H2FY26. ADVERTISEMENT 'Asset quality concern appears to be steadily waning with unsecured segment stress showing gradual signs of stability, while the secured segment asset quality continues to hold up well. At present, we would prefer banks with promising growth prospects, healthy deposit franchises, stable asset quality metrics and strong and steady management teams.' Also read: RBI slashes rates by 50 bps: What it means for debt mutual fund investors ADVERTISEMENT With the RBI maintaining a neutral stance and indicating scope for further easing if inflation remains benign, NBFCs and banking companies could continue to benefit from the evolving rate cycle. (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times) (You can now subscribe to our ETMarkets WhatsApp channel)
Time of India
43 minutes ago
- Time of India
Bajaj Finance shares jump 5% after RBI cuts repo rate by 50 bps, CRR by 100 bps
Shares of Bajaj Finance jumped 5.5% to hit an intraday high of Rs 9,425.5 on the BSE in Friday's trade, as the Reserve Bank of India's 50 basis point repo rate cut and 100 basis point CRR cut sparked broad optimism in the lending sector, especially among non-banking financial companies (NBFCs). While the aggressive repo rate cut is expected to weigh on net interest margins (NIMs) for banks in the near term, the RBI's simultaneous move to reduce the Cash Reserve Ratio (CRR) by 100 bps, unlocking Rs 2.5 lakh crore of liquidity, has emerged as a game-changer for the credit ecosystem. For NBFCs like Bajaj Finance, which rely on borrowing from banks and capital markets to fund lending, this dual move of easing both rates and liquidity is expected to lower funding costs and support loan growth. Analysts noted that NBFCs stand to benefit disproportionately from the rate cut as falling interest rates reduce borrowing costs, enabling lenders to offer more competitive loan products and expand their credit books. Also read: RBI's bazooka sends Sensex, Nifty soaring. What does it mean for stock market investors 'This move is likely to enhance liquidity in the system, making borrowing cheaper and encouraging companies to pursue capital expenditure,' said Divam Sharma, Founder of Green Portfolio PMS. 'With FPI inflows slowing down, this infusion of liquidity is a timely and welcome move.' According to Arsh Mogre, Economist at PL Capital, 'By lowering both the price (repo) and quantity (CRR) of money, the RBI has flattened the transmission curve. The CRR cut in particular offsets short-term pressures on margins from falling lending rates.' For a lender like Bajaj Finance, improved liquidity and falling interest rates are likely to aid credit disbursal, support margins, and revive consumption-led demand, especially in retail and SME segments. 'Tailwinds for NIMs from improving systemic liquidity and deposit rate cuts are visible,' said Naveen Kulkarni, CIO at Axis Securities PMS. However, he said, even as H1FY26 will see a more pronounced impact of the rate cut on NIMs, some respite is expected over H2FY26. 'Asset quality concern appears to be steadily waning with unsecured segment stress showing gradual signs of stability, while the secured segment asset quality continues to hold up well. At present, we would prefer banks with promising growth prospects, healthy deposit franchises, stable asset quality metrics and strong and steady management teams.' Also read: RBI slashes rates by 50 bps: What it means for debt mutual fund investors With the RBI maintaining a neutral stance and indicating scope for further easing if inflation remains benign, NBFCs and banking companies could continue to benefit from the evolving rate cycle.
&w=3840&q=100)
Business Standard
an hour ago
- Business Standard
'We've won the inflation battle': RBI Guv Sanjay Malhotra on rate cuts
The Reserve Bank of India on Friday expressed confidence in having brought inflation under control, shifting its focus toward sustaining economic growth. Speaking after the Monetary Policy Committee (MPC) meeting, RBI Governor Sanjay Malhotra said the central bank had effectively curbed price pressures. 'We have won the inflation battle,' he declared. Retail inflation, as measured by the Consumer Price Index (CPI), eased to 3.16 per cent in April, the lowest since July 2019, and remained below the RBI's 4 per cent target for the third consecutive month. A sharp fall in food inflation, down to 1.78 per cent from 8.7 per cent a year earlier, played a key role in this easing trend. Meanwhile, Wholesale Price Index (WPI) inflation fell to 0.85 per cent in April from 2.05 per cent in March, driven largely by a decline in fuel and power prices. Our choice was to give certainty to markets: RBI guv Explaining the timing of the policy moves, Malhotra said, 'Our choice was to keep the stance accommodative but not act, or to act and change the stance to neutral. We chose to act. Actions are as important as intent.' He said, 'Whatever we do, we do decisively and at the right time. The more certainty we give to markets and banks, the stronger our macros will be.' The RBI reduced the repo rate to 5.5 per cent, and lowered the Cash Reserve Ratio (CRR) to 3 per cent from 4 per cent, to be implemented in four tranches starting in September. The RBI governor said the CRR move alone would inject about ₹2.5 lakh crore into the system by November-end. 'We could have announced the CRR cut later,' he said, 'but we did it today to assure banks that liquidity will be maintained. It gives them room to plan credit and reduce rates.' CRR comfortable for liquidity management Explaining the rationale behind the CRR cut, Malhotra said, 'Over the last 12–13 years, CRR has mostly remained at 4 per cent. During Covid, we reduced it by 1 per cent. Based on current experience, 3 per cent is a comfortable reserve ratio from a liquidity management perspective.' He estimated the cut could improve bank Net Interest Margins (NIMs) by at least seven basis points. Neutral stance means data-dependent decisions On the shift from an accommodative to a neutral stance, Malhotra clarified, 'Neutral means we are open to either direction; it all depends on incoming data. The statute doesn't mandate a vote on stance, but all six MPC members were in agreement to shift to neutral.' He said the MPC has 'limited scope to boost growth', which made the change in stance necessary. 'If the data demands that we stay put, we will. But if it points to further action, we will not hesitate,' he said. Lending norms eased for small loans, gold loans In an effort to improve credit access, especially for small borrowers, the RBI announced the following: LTV cap for small loans (up to ₹2.5 lakh) has been raised to 85 per cent from 75 per cent, including interest. Final guidelines for gold loans will be released by Monday. Credit appraisal will no longer be required for small-ticket gold loans. End-use monitoring will apply only to loans under Priority Sector Lending. These changes are likely to ease access to funds for low-income borrowers, particularly in rural India where gold loans are a primary source of credit. Liquidity abundant; no target call rate On liquidity management, Malhotra reiterated: 'Liquidity is abundant. We have not set any target call rate. We'll watch how the situation evolves, but right now, there's no concern.'
