Auto Sector: E-Vehicle policy unlikely to hurt Indian OEMs

18 Mar 2024 , 10:25 AM

The Government of India has approved a Scheme to promote India as a manufacturing destination for EVs. The Scheme would incentivise OEMs that commit to setting up EV manufacturing operations in India, by allowing them to import foreign-made EVs into India at a concessional customs duty (15% customs duty vs existing duty of 70%/100%). The lower duty can be claimed for vehicles priced at or above USD35,000, translating to a minimum on-road price of Rs4.5mn. This is much higher than the price range of EV offerings planned by Indian OEMs. Moreover, the number of vehicles that can be imported under this scheme is limited to 8,000 EVs p.a. Lastly, no specific incentives have been listed for the output of the new EV plants. Hence, the playing field stays level vs Indian OEMs making EVs, as was the case even before the announcement of this policy. Overall, analysts of IIFL Capital Services believe that this scheme is unlikely to hurt Indian OEMs.

The Scheme:

The Scheme would incentivise OEMs that commit to setting up EV plants in India, by allowing them to import foreign-made EVs into India at a concessional customs duty. In order to be eligible for the Scheme, each OEM is required to make a minimum investment of USD500mn to set up an EV plant in India. The plant should commence operations within 3 years. The plant should achieve 25% localisation (domestic value addition) by Year 3 and 50% localisation by Year 5.

The Incentive – Lower customs duty for a limited number of high-priced EVs:

The eligible OEM gets the right to import foreign-made EVs into India at a concessional basic customs duty of 15%. The current basic customs duty is 70% for Cars-CBU (completely built-up) priced at less than USD40,000 (CIF value) and 100% for Cars-CBU priced above USD40,000. Concessional duty of 15% is only applicable for cars priced at USD35,000 or above, so as to prevent the import of low-priced vehicles. Only 8,000 EVs can be imported into India p.a., under this Scheme.

This Scheme is not an incremental negative for Indian OEs:

No specific incentives have been listed out for the output of the new EV plants, set up under this Scheme. Hence, the playing field stays level vs Indian OEMs making EVs, as was the case even before the announcement of this policy. As regard to the import of EVs at concessional duty, these are restricted to high-priced EVs and low number of vehicles. Minimum price of EVs that can be imported at concessional duty is USD35,000. After adding 15% duty + GST/Cess + transport cost + dealer margins + road tax & insurance, analysts of IIFL Capital Services estimate it to translate to an on-road price of USD52-53k or Rs4.5mn. This is much higher than the price-range of EV offerings planned by Indian OEMs. Moreover, only 8,000 EVs p.a. can be imported under this Scheme.

Lower customs duty – Bigger benefit for Indian car-buyers, rather than foreign OEMs:

Unlike PLI schemes that incentivise manufacturers, this Scheme benefits the Indian car-buyer. For instance, if 8,000 vehicles with an average CIF price of say USD50,000 are imported in Year 1, it would translate into a revenue of USD400mn for the foreign OEMs, on which it may clock an Ebitda margin of 12-15%, translating into Ebitda of USD48-60mn. On the other hand, Indian carbuyers would benefit from lower price of imported cars, translating to USD340mn i.e. USD400mn x 85% (100% customs duty, less 15% concessional duty). The Scheme may help the foreign brand get an entry into the India market. However, if the OEM is unable to meet the listed conditions (investment, timelines, localisation), it would be liable to pay the “customs duty foregone” to the government.

Is the Indian EV market lucrative enough?

The electrification rate in the PV industry in India is only at 2%. In fact, electrification has plateaued in the last 12 months at about 2%. The majority of these sales are of EV models priced at less than Rs2.0mn (on-road). Coming to affordability, the sales of premium brands (BMW, Mercedes, Audi, JLR and Volvo) in FY24 is about 42,000 units, which is only about 1% of the car market of 4.2mn. Only 2,000-2,500 of these premium cars were EVs. Lastly, if Tesla were to manufacture EVs in India, it would start with its most affordable models i.e. Model 2 and Model 3 (hatchback/sedan). In a market which has rapidly moved to SUVs, will Indian customers gravitate back to these body-types?