The Double Challenge for EV Profits

Electric vehicle manufacturers are facing significant challenges as rising raw material prices and ongoing supply chain problems impact profitability. Geopolitical instability, especially events in West Asia, combined with intense competition for key components from the booming AI sector, is creating a perfect storm for the auto industry. Companies report significant cost increases for essential materials like lithium-ion cells, rare earth magnets, and memory chips, leading to pressure on short-term profits and planned price increases for consumers.

Key Factors Driving Up Costs

Two-wheeler makers like Bajaj Auto and Hero MotoCorp are facing major cost increases. Bajaj Auto estimates commodity costs could rise 3.5-4.0% in the March quarter. Hero MotoCorp reported increases in the cost of components in the high single digits. Ather Energy also warned of short-term profit cuts due to higher prices for commodities and electronic parts. Bajaj Auto's production capacity has been reduced by 10-15% due to LPG shortages, staff migration, and logistics issues, partly offset by price hikes in April. Hero MotoCorp has increased prices by about 2% across its models, but these hikes don't fully cover rising input costs for materials like aluminum, steel, rubber, and plastics.

AI's Chip Demand and Geopolitical Impact

The demand for AI infrastructure is hitting the automotive supply chain, especially for memory chips. Manufacturers are shifting capacity to higher-margin AI applications, leading to sharp price increases for RAM and DRAM chips; prices have risen two to four times in some cases. This shift in focus by major chip producers like Samsung, SK Hynix, and Micron, who together supply over 90% of DRAM, means the auto sector, which accounts for a smaller share of global DRAM revenue, has less bargaining power and faces higher costs. Wells Fargo analysts predict DRAM prices could jump 70-100% in 2026, affecting vehicles that need more memory, such as premium models and EVs. Beyond semiconductors, prices for battery materials like lithium, nickel, and cobalt, alongside base metals such as aluminum and copper, have jumped. Lithium, for instance, has tripled in price recently per kilogram.

Broader Auto Market Trends

While the broader Indian auto sector is expected to grow 6-8% in 2026, helped by government policies and returning demand, this sector is also feeling these cost pressures. Other carmakers are raising prices; Hyundai Motor India plans to increase prices in May due to rising commodity prices. Tata Motors, JSW MG Motor India, BMW India, Mercedes-Benz India, Audi India, and Honda Cars India have already raised prices or announced plans to do so. Mahindra & Mahindra also raised prices on its gasoline and diesel SUVs and commercial vehicles.

Key Company Financials

As of May 2026, Bajaj Auto has a P/E ratio of about 29.7, while Hero MotoCorp has a P/E ratio around 18.4. Bajaj Auto's market value is nearly ₹2.96 lakh crore, and Hero MotoCorp's is about ₹1.06 lakh crore. Bajaj Auto's higher P/E indicates investors expect higher growth, while Hero MotoCorp's P/E is near its 10-year average.

Analyst Views and Targets

Hero MotoCorp was rated 'Buy' by Choice Institutional Equities with a target price of ₹6,000, based on strong Q4 FY26 results and a positive outlook. However, other analysts are more cautious. Prabhudas Lilladher rated Bajaj Auto 'Hold' with a target of ₹10,400. Citi rates Bajaj Auto 'Sell' with a target of ₹9,300, and Morgan Stanley rates it 'Underweight' with a target of ₹9,259, citing cost pressures and valuation concerns. Analyst consensus for Bajaj Auto's 2026 target price is about ₹9,800, suggesting modest gains, while Hero MotoCorp's consensus target is between ₹5,000–5,500, indicating potential gains.

Key Risks and Vulnerabilities

Despite recent positive analyst ratings for Hero MotoCorp, significant risks remain for both manufacturers. The main risk is the rising costs of key raw materials, especially lithium, nickel, and cobalt for batteries, and memory chips. India's heavy reliance on imported battery components and raw materials leaves its EV sector exposed to global price swings and geopolitical issues, making it harder to compete on cost internationally. For memory chips, automakers are less important customers than AI data centers, facing much higher prices and supply shortages. The combined pressure from geopolitical events, like the West Asia crisis, and AI chip demand forces companies to pass costs to consumers through price hikes, which could hurt demand, especially in budget segments. Bajaj Auto's reliance on exports, particularly to price-sensitive regions, exposes it to currency swings and geopolitical instability. While Ather Energy is designing its upcoming EL scooter to use fewer expensive materials, this is a future plan and doesn't help with current cost pressures.

What's Next for EV Makers

Looking ahead, EV makers expect ongoing fuel and gas supply issues might push more consumers toward electric vehicles for long-term savings. However, the immediate future for manufacturers like Bajaj Auto and Hero MotoCorp will likely require managing high commodity prices and supply chain uncertainties. The ability to control costs, raise prices smartly without hurting demand too much, and ensure stable component supplies will be key to staying profitable and competitive through 2026 and beyond.