Indian automaker shares experienced a decline on January 27 following the finalization of the much-awaited free trade agreement (FTA) between India and the European Union. The agreement includes significant changes to automotive tariff structures that have prompted market reactions and analyst commentary on the sector's outlook.

Tariff Reduction Framework

Under the new India-EU FTA, the country will implement a phased reduction of automotive tariffs over the next five to ten years. The European Commission announced that India will gradually cut tariffs on cars from the current 110% to as low as 10%, while completely abolishing duties on car parts within the specified timeframe.

The tariff reduction on battery electric vehicles (BEVs) from 100% is expected to be applicable after 5 years in a phased manner, providing some relief to domestic manufacturers.

Market Impact Analysis

PL Capital noted that while the FTA will provide EU carmakers greater access to the Indian passenger vehicle market—the third largest globally by volume behind the US and China—the impact on domestic players may be limited. The brokerage emphasized that luxury vehicles comprise approximately 1% of the Indian market, suggesting minimal impact on mass market players.

According to analysts, companies like Maruti Suzuki and entry-to-mid-level vehicles from Tata Motors Passenger Vehicles and Mahindra & Mahindra should remain largely unaffected, though premium plus cars from these manufacturers may experience some impact.

Industry Response and Analysis

Harshal Dasani from INVasset PMS highlighted that the immediate concern for equities centers on near-term uncertainty rather than long-term competitiveness. "Markets are reacting ahead of operational clarity, which explains the visible churn in auto counters despite the absence of any immediate earnings impact," Dasani explained.

For investors, key variables to monitor include:

• Premium-segment exposure
• Pricing discipline
• Localisation depth
• Export optionality

Hardeep Singh Brar, President and CEO of BMW Group India, viewed the agreement positively, calling it "a strong and positive signal of confidence in India's long term growth story" and describing the India-EU FTA as "a historic milestone benefiting both sides."

Stock Performance

The Nifty Auto index declined more than 1.40% as of 2:42 pm on January 27. Mahindra & Mahindra shares led the losses, falling more than 4.50% to trade at ₹3,382.50 per share. Maruti Suzuki and Tube Investments of India shares each declined around 2%, while Tata Motors Passenger Vehicles, Ashok Leyland, and Exide Industries shares were down over 1% each.

Bosch, TVS Motor, and Bharat Forge shares also traded in negative territory with marginal losses. Analysts suggest that companies with strong SUV mix, diversified geographic revenues, and robust balance sheets are better positioned to absorb competitive pressure from the tariff changes.

Leading brokerages are projecting strong earnings growth for Indian automakers in the December quarter, with most companies expected to deliver double-digit net profit growth. The optimistic outlook is driven by a sharp recovery in sales, improved product mix, and stable commodity inflation following GST rationalization in September.

Strong Earnings Growth Projections

Three major brokerages have released bullish forecasts for the auto sector's Q3 FY26 performance:

Motilal Oswal expects all companies in its coverage universe (excluding Jaguar Land Rover) to clock healthy double-digit earnings growth, with the lowest growth projected at 13% for Hyundai Motor and the highest at 62% for TVS Motor Company.

Margin Outlook and Key Drivers

Brokerages expect Ebitda margins to remain stable or improve marginally across the sector. Motilal Oswal estimates aggregate Ebitda margin for its OEM coverage universe to rise by 30 basis points YoY to 13.50%. The brokerage noted that while input costs may rise slightly on a quarter-on-quarter basis due to higher precious metal prices, this impact is expected to be partially offset by:

• Easing steel prices
• Operating leverage benefits
• Moderation in discounts

Axis Direct expects YoY Ebitda margins to improve due to a richer product mix, including higher exports and price hikes taken over the past year. On a sequential basis, the brokerage estimates Q3 FY26 revenue, Ebitda, and PAT growth to rise by 11.50%, 16.00%, and 17.30% respectively, with Ebitda margin expansion of over 56 basis points.

Demand Recovery and Market Dynamics

The positive outlook is underpinned by sustained demand momentum following GST rationalization in September. Key factors driving growth include:

• Strong pickup in demand for entry-level vehicles across two-wheelers and passenger vehicles
• Sustained momentum even after the Navratri to Diwali festive season
• Robust wholesale performance in December with companies pushing demand through healthy discounts
• More affordable pricing for budget-conscious buyers

Top Stock Picks

Brokerages have identified their preferred stocks based on projected performance:

Motilal Oswal specifically highlighted Maruti Suzuki as its top pick among auto OEMs, citing the company's new launches and strong export momentum expected to drive healthy earnings growth. The brokerage also favored Mahindra & Mahindra, supported by an uptrend in tractor demand and robust growth in the utility vehicle segment.

Sector Outlook

The auto sector's strong performance is expected to be supported by favorable regulatory norms, stable commodity inflation, and the benefits of GST cuts implemented in September. Choice Institutional Equities noted that the growth is driven by a surge in demand supported by GST rate changes and post-festive season momentum. All brokerages emphasized that none of the auto OEMs are expected to see any meaningful margin decline on a year-on-year basis, reinforcing the positive earnings outlook for the quarter.