India-EU FTA: Competition threat 'overblown' for Indian auto, say analysts

India-EU FTA may lift export potential for Indian automakers with limited import risk, analysts say

The India–European Union Free Trade Agreement (FTA) is expected to bring incremental gains for Indian automobile players, analysts said on Wednesday, as they saw fears of a surge in European imports "overblown".

 

Analysts tracking the sector believe the agreement could gradually improve export prospects for select Indian manufacturers, particularly in premium motorcycles and electric vehicles (EVs), with limited threat from the expansion of European auto players in the domestic market.

 

"We view the India-EU FTA as a positive for the Indian automobile sector, which can raise export potential for Indian original equipment manufacturer (OEMs) and suppliers, while the risk from imports is likely to be low. As for auto ancillary space, the FTA does not change the competitiveness, at the margin, and thus remains a positive tailwind for the sector," said a note by Japan-based brokerage Nomura.

 

As per the broad contours of the deal, effective import duties on cars priced below $40,000 will gradually fall to 10 per cent from 70 per cent. It will be cut to 35 per cent from 110 per cent, immediately, for cars priced above $40,000k, and reduced to 10 per cent over time. This segment will have a 250,000 annual quota.

 

That apart, tariffs on Completely Knocked Down (CKD) units will be cut to 8.25 per cent from 16.5 per cent for a 75,000 annual quota.

 

EU-made electric vehicles (EVs) will benefit from the deal after five years of the FTA getting ratified, while tariff on India-made vehicles for exports to the EU will be reduced from 10 per cent to zero over time.

 

Separately, tariffs on auto parts' exports from India are expected to drop from 3.0-4.5 per cent to zero.

 

According to analysts, most European OEMs already operate assembly plants in India and rely on localised CKD routes rather than imports of high-volume models. As a result, tariff reductions may only aid margin protection and/or offset currency pressures.

 

"For CKD units, we anticipate the ex-showroom prices of cars to fall by 8 per cent to at least ₹2.1 million. While price reduction for Completely Built Unit (CBU) models could be larger, we don't see OEMs using CBUs for large-volume models. Hence, the potential for price cuts is limited," said those at BNP Paribas.

 

Also, most European OEMs (Renault, Stellantis, VolksWagen) are already selling their key models in India; thus, the brokerage sees the FTA helping the premium and mass European brands to expand their product offerings in India, marginally expanding the market with limited disruption risks to the existing players.

'Export potential goes up'

Back home, analysts think the Indian passenger vehicle market, dominated by models priced below ₹15 lakh, remains "structurally different from Europe". This limits the scope for direct competition from premium European vehicles.

 

Currently, the European Union accounts for a small share of India’s vehicle exports -- around 2 per cent for passenger vehicles and about 1 per cent for two-wheelers. Yet, analysts think the agreement could create a pathway for Indian OEMs to expand their presence in Europe over time, particularly in higher-value segments such as premium motorcycles and EVs.

 

Royal Enfield, for instance, already has a growing footprint in Europe, where it sells mid-sized motorcycles catering to lifestyle and leisure demand. Lower tariffs could support margins and improve competitiveness in key EU markets.

 

Similarly, Maruti Suzuki, which accounts for over 50 per cent of PV exports to the EU, has begun exporting its electric SUV, the e-Vitara, to Europe, positioning India as a potential global manufacturing hub for EVs, analysts said.

 

That apart, analysts said the exports exposure to the EU countries for Indian 2W and PV OEMs remains negligible given the product portfolio gap compared to the requirements of the EU market.

 

"The trade agreement gives Mahindra & Mahindra an opportunity to export its premium models based on INGLO and NUIQ platforms. For Maruti Suzuki, the company already exports its first EV, e-Vitara, to Europe while it could further look to expand its product portfolio in the EU. Similarly, Tata Motors PV could benefit from the export of its EV products in these regions," BNP Paribas said.

 

Investment theme

Analysts suggest investors to adopt a selective approach rather than a broad-based sectoral bet. Companies with established or emerging export strategies, especially in EVs and premium segments, appear better placed to capture upside from the agreement.

 

Nomura has 'Neutral' ratings on Maruti Suzuki, and Tata Motors PV, and 'Buy' ratings on M&M, and Hyundai India.

 

In the ancillary space, it sees Sona Comstar (Buy), Bharat Forge (Neutral), Sansera Engineering (Buy), and Apollo Tyres (Neutral) as potential beneficiaries.