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.
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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.
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