Auto parts makers get closer to PLI payouts

Sona Comstar, one of India’s leading electric vehicle (EV) parts suppliers to international automakers, and Toyota Kirloskar Auto Parts have received eligibility certifications for their hub-wheel drive motors for e-two-wheelers and e-trans axles, respectively. This makes them the first components makers to qualify to receive benefits under the PLI scheme for advanced automotive technologies.

While three original equipment manufacturers (OEMs)—Tata Motors, Mahindra & Mahindra and Ola Electric—have already cleared the eligibility criteria for the incentives for multiple products, the certifications for auto parts makers were significantly delayed given a complex process involving auditor certifications for domestic value addition (DVA) at the component makers’ tier-II and tier-III vendors.

With the advanced auto parts makers receiving certification confirming they meet the stringent 50% DVA criteria laid down under the scheme, the decks have now been cleared for the government’s move to finally start disbursements under the scheme, which it has said will begin in fiscal year 2025.

However, multiple industry executives said that unless the government decides to settle PLI claims on a quarterly basis, companies that have only now received DVA certification are unlikely to be able to draw any incentives before FY26.

Auto parts makers still have a long way to go before they can receive the actual incentives—which, according to the scheme, range from 13-18% of the incremental sales revenue of each EV part (and 8-13% for non-EV parts). Claims for sales in a certain fiscal year, according to the scheme, will be disbursed the following fiscal.

A Nomura analysis states that even with a conservative estimate of EV adoption in India, PLI claims by OEMs and components makers are likely to far exceed the government’s budgetary allocation for the scheme. The government has allocated ₹604 crore under the scheme for disbursement in FY25 (for claims made for FY24) and ₹3,150 crore in FY26 (for claims made for FY25), out of the total five-year outlay of nearly ₹26,000 crore.

“Our analysis indicates that even on a conservative estimate of EV penetration touching ~6% and 9% for passenger vehicles and two-wheelers by 2W by FY28, the PLI budget may cover about 60% of the PLI claims. Falling battery prices and no changes in taxation/incentives could lead to higher penetration as well. The actual benefit is likely to be lower than 60% as we have not considered claims on exports by OEMs and suppliers. Given that the benefit is likely to get paid out on pro-rata basis, it may be prudent to not assume more than 50% of eligible incentives. Thus, business plans need to stay focused on fundamentals such as strong product offering and cost leadership rather than pricing," the Nomura report said.

For Sona Comstar, which was the first auto component maker to receive DVA certification by the Global Automotive Research Centre (GARC) on 19 February, half a dozen more products are in the DVA approval process, while applications for four more are yet to be made, according to a top official at the company.

These include mid-mount traction motors, motor controllers, e-differential assembly and electronic differential lock (EDL). Sona Comstar expects it can meet the sales threshold for unlocking incentives amounting to 11% of incremental sales over FY20 levels, but because the total aggregate claims is not known, the company cannot quantify the actual payout it expects to receive.

“We plan to utilize the PLI incentives to enhance our competitive moat," Vivek Vikram Singh, chief executive, Sona Comstar, said. “We export a considerable part of our production, so the incentives will work to make us more competitive vis-à-vis foreign manufacturers, and against both domestic and foreign manufacturers in the domestic market. We aren’t going to base our business model solely on the expectations of PLI payouts."

“We believe most OEMs are likely to use the PLI incentive to grow the market as a primary aim rather than to expand margins," the Nomura report noted, adding that it expects OEMs like Tata Motors, Mahindra & Mahindra and suppliers including Sona Comstar and Uno Minda to be the largest beneficiaries of the scheme.

Tata Motors in its Q3FY24 earnings call, however, had indicated it is banking on PLI incentives to fund further growth in its EV business, as opposed to any external fundraise.