India’s manufacturing capabilities have been lagging. India contributes only to 2% of the global manufacturing output, a tenth of what China contributes. The government seemed encouraging after all the roar around Make in India. But Make In India alone wasn't cutting it.
Then came the PLI (Production-Linked Incentive) Scheme. And now it looks like there’s strength in fundamental stepping-stones to boost manufacturing in India. There’s been a lot of action on ground since the PLI, and there are several stocks that can directly and indirectly benefit from this scheme. Time to make money!
But first, what is PLI?
The government gives incentives to companies on incremental sales from products manufactured in domestic units.
First the government chooses sectors it wants to boost India’s manufacturing capabilities in. Then it selects companies that will be eligible for availing these incentives.
Then it pays these companies a specific percentage of their incremental turnover from making and selling these products as an incentive over the next few years.
How does it help?
First, companies get encouraged to set up shop in India. If they get a certain percentage of revenue as benefits for making and selling products, it acts as an extra margin. It can also be looked at faster recovery of the capital laid out by the company. These monetary benefits improve ROIs for companies, encouraging them to set up in India.
With more manufacturing in India, India’s import dependence reduces. Locally sourced and built products provide better economic benefits. Along with it, an ancillary boost can also be seen in raw employment, infrastructure development, supply chains, and the a build-up of ancillary industries.
How does it work?
Companies registered in India and engaged in the manufacture of goods covered by the scheme's target segments are eligible to apply for the PLI Scheme.
To be eligible for incentive disbursement for the year under consideration, an applicant must meet threshold criteria (i.e. incremental investment) of at least Rs. 10 crore and a maximum of Rs. 1,000 crore.
To meet the incremental investment threshold criteria for any year, the cumulative value of investment made up to that year (including the year under consideration) over the base year (2019-20) shall be considered. Some industries have threshold criteria for incremental sales as well.
Companies will be eligible for the incentive scheme if they incur additional expenditure on plant, machinery, equipment, research and development, and technology transfer for manufacture in the target segments.
The scheme will provide eligible companies with a 4% to 6% incentive on incremental sales (over the base year, i.e. 2019-20), for a period of five years following the base year.
The central government has announced an investment of Rs. 1.97 lakh crores in 14 key sectors for the Production Linked Incentive (PLI) Schemes.
Which stocks can benefit from this?
Here’s a little list of what stocks can benefit from the PLI Scheme, both directly and indirectly, which we also have exposure to in our equity portfolios.
1. Motherson Sumi
The PLI Scheme for the Automobile and Auto Component Industry in India has attracted proposed investment of Rs 74,850 crore. Motherson Sumi recently received government approval under India's Production Linked Incentive (PLI) Scheme for Automobile and Auto Component Industry. Motherson Sumi Systems Limited is an Indian automotive component manufacturer and global supplier.
2. Laxmi Machine
The fact that significant investment in the textile value chain is planned under PLI is a good sign for the textile machine manufacturer. Laxmi Machine Works has also received orders from customers who are investing in the spinning segment through the PLI scheme.
PLI will be a critical business enabler for PGEL in the Air Conditioner segment. It is best-positioned company to take advantage of this expansion opportunity. They have already committed Rs. 321 crores in capex to the PLI scheme, with approximately Rs. 92 crores committed in this fiscal year. They have pledged to have incremental AC component revenues of Rs. 1,500 crores by FY27.
4. Olectra Greentech
Olectra Greentech is India's largest EV bus manufacturer, and it has decided to build the country's largest EV bus manufacturing plant, with a capacity of 10,000 units. The company also hopes to capture a large share of the government-incentivized clean mobility scheme. It claims that it is eligible for the government's PLI scheme for electric vehicles manufacturing and that it will receive significant government incentives.
5. Borosil Renewables
The government has announced incentives worth Rs 24,000 Crores to promote manufacturing of High Efficiency Solar PV Modules. Borosil Renewables is the first and only solar glass manufacturer in India. Solar glass is a critical component in manufacturing solar modules. In anticipation of the same, it recently increased its solar glass capacity. Solar panel manufacturers will use more locally sourced material because the higher the domestic content used in module manufacturing, the higher the PLI.
6. Xpro India
Under the PLI for White Goods, 61 companies have committed a Rs 6,632-crore investment over the next five years. The stated production is worth Rs 1,22,671 crore. Xpro India remains the leading supplier of electronic components for most major brand white goods. It will benefit indirectly from the PLI scheme because increased domestic production of white goods will increase demand for its products.