New Delhi, April 3 – The Indian auto companies are facing significant cost pressures, but the market is systematically underestimating them, according to a report released on Friday. This is happening even as investor sentiment towards India has become distinctly more cautious.
A BNP Paribas analysis found that investors are reluctant to take a clear position on the market. Hedge funds are largely removing specific exposures from their portfolios, with several actively reducing their overall exposure.
The rapid reversal of US tariffs last year has led investors to believe that the current energy crisis may be short-lived.
The overall outlook on India has become more negative. A key concern is the availability of LNG (liquefied natural gas). Investors fear that this could be a longer-lasting issue for India, distinct from the volatility in oil prices.
Unlike crude oil, which is seen as a temporary price shock, disruptions in LNG supply could potentially lead to prolonged declines in corporate earnings.
The report also highlighted that investors based in Hong Kong are slightly less pessimistic about India than their counterparts in Singapore, partly due to the fact that Hong Kong-based investors are acting as regional allocators, navigating increased volatility in other Asian markets.
Investor conversations are heavily focused on the impact on demand rather than cost.
There is a broad consensus that commercial vehicles are facing the sharpest demand headwinds, linked to a slowdown in government capital expenditure.
Moreover, two-wheelers are generally seen as better positioned than passenger vehicles in terms of demand, although BNP cautions that historical macro cycles do not clearly support this conclusion.
Demand for tractors is also being closely watched, with investors worried about a potential increase in diesel prices, which BNP says is not well-supported by historical demand data.
More significantly, the bank notes that cost inflation is receiving relatively little attention and could be a source of unexpected negative earnings surprises.
In terms of positioning, investors favor two-wheelers over passenger vehicles, and are most pessimistic about commercial vehicles.
The report also noted that there is considerable divergence in individual stock views within each segment.
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