Auto stocks slide as India-EU deal makes European cars cheaper
What's the story
Shares of major Indian automobile manufacturers such as Mahindra & Mahindra (M&M), Maruti Suzuki India, and Tata Motors have taken a hit. The fall comes amid concerns over the impact of the recently signed India-European Union (EU) Free Trade Agreement (FTA). M&M's shares fell by around 5% to ₹3,366.50 on the BSE today while Maruti Suzuki's stock declined by almost 3%. Tata Motors' share price also fell by 2%.
Tariff impact
EU's automotive industry to benefit from reduced tariffs
The India-EU FTA is likely to benefit the EU's automotive industry. Under the new deal, tariffs on a quota of 250,000 vehicles will drop from up to 110% to 10% over five years. This would give European luxury car makers like Volkswagen, Mercedes-Benz, and BMW an edge in pricing their vehicles competitively. Seema Srivastava of SMC Global Securities said this move by India could shake up the domestic auto sector.
Market shift
Indian auto manufacturers may face increased competition
The reduction in import tariffs is expected to increase competition for domestic players such as Tata Motors and M&M in the luxury segment. However, local dealerships and service providers are likely to benefit from this move. Bhavik Joshi of INVasset PMS noted that while India currently has high import duties on fully built passenger cars, these barriers are not expected to be removed immediately under the proposed framework with the EU.
Tariff strategy
Gradual tariff reductions and potential market protection
Joshi anticipates that tariff reductions will be gradual, likely depending on vehicle price segments, engine specifications, and possibly subject to annual quotas. He believes luxury/high-end vehicles could get relief sooner while mass-market vehicles may stay protected for a longer time. Anshul Jain of Lakshmishree Research said auto majors have all broken below their respective weekly swing lows indicating a clear deterioration in price structure.