India EU FTA

• India-E.U. trade deal may boost India's exports to EU by $50 billion
• Textile, pharma, and chemical sectors expected to benefit from tariff reductions
• Faster drug approvals and lower costs could aid Indian pharma exports to EU

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The India-E.U. trade deal is likely to be announced later today, with analysts hoping that the "mother of all deals" can bring some much needed optimism to the domestic equity market. The buzz has lead to a smart rally in shares of KPR Mill, Welspun Living, and Nitin Spinners, which are expected to benefit from the FTA.

At the current juncture, India's exports to the European Union make up 17 percent of its total exports. According to Emkay Global, the bilateral agreement could lift India's exports to the E.U. by roughly $50 billion, as a result of medium-tech manufacturing.

"Improved import efficiency and higher FDIs would further support productivity gains and tech transfers, while greater regulatory certainty could aid IT services exports, where the E.U. already accounts for a third of the demand," added the brokerage.

As a result, the key sectors that investors could look at to cash in on the optimism are the pharma, textiles, and chemical segments, which are aligned with India’s broader structural recalibration of exports. However, Emkay added that while the India-E.U. deal could be taken well by the markets, a fruitful U.S.-India deal, stability in the rupee, and reduced global noise remain crucial.

Textiles

While Indian textile and apparel exports to the E.U. make up roughly 38 percent of the total, Indian textile imports are just five percent of E.U.'s total.

E.U.’s top suppliers for textiles and apparel in CY24 are China (~28 percent), Bangladesh (22 percent), Turkey (~11 percent), Vietnam (~6 percent), India (~5 percent). Further, while India sees between 10-12 percent tariffs, , Bangladesh, Vietnam, Ethiopia see 0 percent tariff via FTAs.

"If tariff drops from 10-12 percent to 0 percent, then India will have a massive boost in price competitiveness, as it would be in parity with Vietnam and Bangladesh. India is well placed to capture higher market share in knitwear, outerwear, and trousers," noted Emkay.

Stocks to watch:

If India reduces its import duties on vegetable textile fibers, paper yarn, and woven fabrics, then it will likely benefit Indian fabric manufacturers who will see lower input costs. On this front, the key beneficiaries will be Arvind, Vardhaman Textiles, and KPR Mills.

Further, if the E.U. reduces tariffs on textiles to zero, India will be well-placed to capture higher market share in knitwear, outerwear, and trousers from Bangladesh and Vietnam, leading KPR Mills to benefit.

Pharmaceuticals

India’s formulations export to the E.U. stood at $2.95 billion, which totals around 12 percent of India's total pharma formulations exports. However, India accounts for only 2.2 percent of the E.U.’s total pharma imports, indicating that there is significant headroom for growth.

Emkay noted that drug approvals in the E.U. are very slow, they usually take between 2-3 years, with hefty fees. With  stringent refiling requirements and serious red-tape, the entry of generics into the E.U. market is often delayed.

"The major outcomes could include regulatory cooperation such as accelerated marketing approvals, lower cost of application, and better generic companies’ approvals. Lower approval friction would help Indian generics scale up E.U. dossiers, win more tenders, and reduce US dependence, while giving European pharma cost and sourcing flexibility that could benefit Indian CDMOs," added Emkay. Following this, Indian biosimilar players would also gain faster, easier access to E.U. markets.

Stocks to watch:

Biosimilars: Biocon, Dr Reddy's

Generics: Lupin, Aurobindo, Torrent Pharma, Ipca Laboratories, Sun Pharma

Chemicals

India is a net importer of chemicals, primarily led by imports of bulk chemicals like PVC, Epoxy Resins, Polycarbonate, Phenol, etc. India imported $71 billion worth of chemicals and exported $39 billion in CY24.

However, India has been a net exporter of chemicals, when it comes to trade of chemicals with the E.U. countries. India exported $8.9 billion worth of chemicals in CY24 to the E.U. compared to imports of $7.7 billion.

Currently, India charges hefty import duties ranging at 0-10 percent (while key chemicals have duties in the 7.5-10 percent range) to safeguard the interest of the domestic industry. On the contrary, the E.U. generally has lower tariffs on Indian chemical products ranging at 3-5 percent.

Stocks to watch

According to Emkay, signing the FTA will lead to an increase in export volumes to the E.U. for domestic Indian manufacturers, with an increased possibility of subcontract/tolling opportunities for Indian manufacturers for EU.. companies, as they face cost pressures.

"We believe that based on volume growth and effective operating leverage due to the abovementioned factors, EBITDA margin may improve to the 100-400 bps range. Based on our workings, we have identified more than 10 companies that have a substantial share of >15 percent of their revenue coming from exports to EU countries," added the report.

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