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The government’s production linked-incentive (PLI) scheme for the automobile industry would speed up electric vehicle (EV) adoption, but beyond that India’s vehicle manufacturers would benefit only in the long run.

The total incentive of 26,100 crore offered under the scheme is far lower than the originally intended 57,000 crore. This is because petrol, diesel and compressed natural gas (CNG) vehicles have been excluded, analysts pointed out.

The fallout is that the challenges of rising costs, weak demand and semiconductor shortages faced by original equipment manufacturers (OEMs) would remain.

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More wheels to run 

The PLI scheme is clearly intended for manufacturers that have invested in or are planning to invest in advanced automotive technologies, particularly EVs. A part of it is also intended to achieve import substitution by encouraging local manufacturing.

“The government has laid a strong foundation for rapid adoption of EVs in India by providing attractive incentives to both manufacturers and consumers," said analysts at Kotak Institutional Equities in a note. The EV segment, especially two-wheelers, can see rapid adoption over the coming years and incumbents will have to step up, they said.

EVs in the passenger vehicle segment may also benefit, though incentives in this space are limited.

“The scheme should help bring the break-even on the total cost of ownership for cars to about 30-35km per day of driving, we estimate, close now to the 30km per day of average car ridership in India," said analysts at Credit Suisse.

However, given that there is no Faster Adoption and Manufacturing of Electric Vehicles (Fame) subsidy for electric cars, unlike other vehicle segments such as two-wheelers, the PLI scheme would help improve the economics but not tilt it overwhelmingly in favour of electric the way it does in the case of two-wheelers, they said.

For original equipment manufacturers, the incentive levels range from 13% to 16% of the average selling price and for suppliers, it ranges from 8% to 11% for non-EV components and from 13% to 16% for EV parts.

Key beneficiaries in the auto component space are mostly global multinational corporations such as Bosch, Continental, Delphi Automotive and Denso Corporation, according to analysts.

Other domestic auto ancillaries such as Minda Industries, Endurance Technologies, Varroc Engineering and Schaeffler India can benefit as well, they said.

However, analysts are of the view that existing two-wheeler OEMs in the conventional internal combustion engine segment may be adversely impacted in case of fast EV adoption in the country.

“For incumbent two-wheeler OEMs, Hero MotoCorp Ltd, Bajaj Auto Ltd and TVS Motor Company Ltd, we would remain cautious given the threat to margins, market shares and multiples from the EV inflection in two-wheelers," said analysts at Credit Suisse.

In a nutshell, manufacturers that have invested in capacity enhancement will walk away with benefits. The PLI scheme mandates minimum investments that a company needs to make to be eligible for the scheme. Companies need to fork out anywhere between 300 crore and 2,000 crore over the five-year period beginning FY23 to get incentives.

That explains the rather muted reaction of shares of auto companies following the announcement of the scheme on Wednesday. The Nifty Auto Index has gained 2% since the announcement.

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