Cabinet nod for Rs 26,058 crore production-linked incentive (PLI) scheme is expected to be largely beneficial for auto ancillary stocks and is also a part of government’s motive to create India a manufacturing hub and job opportunities, say experts who are bullish on these stocks.
The Finance Ministry in the budget has announced the PLI scheme for three sectors. On September 15, in a Cabinet meeting, the government has approved the PLI scheme for the auto sector to promote domestic manufacturing and create job opportunities.
The cabinet approved incentives worth Rs 25,938 crore to be provided to the industry over five years to promote the automotive technology and Rs 120 crore will be provided to the drone industry over three financial years.
“The measures announced for the telecom and auto industry are sweeping with potential for far-reaching beneficial impact. The Rs 26,058 crore PLI scheme for autos, auto components and drones is a major initiative to attract advanced auto technology and supply chains into India,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
“This is a timely policy when global supply chains are looking for markets outside China for shifting supply chains. The PLI scheme’s goal of investment of Rs 42,500 crore in 5 years is ambitious but achievable. In brief, bold reforms,” he added.
Rahul Sharma, Co-Founder at Equity99 also believes the PLI scheme for the automobile and auto components industry will lead to a fresh investment of over Rs 42,500 crore, incremental production of over Rs 2.3 lakh crore and will create additional employment opportunities of over 7.5 lakh jobs.
In a press conference Minister of Information and Broadcasting of India Anurag Thakur said only companies which fulfil the investment and revenue criteria would get the benefits.
“Automobile companies that will invest Rs 2,000 crore for four-wheelers and Rs 1,000 for two-wheelers over 5 years will be eligible for the government’s PLI scheme. Similarly, companies who invest more than Rs 80 crore will be eligible for the government’s PLI scheme,” he said.
“The scheme looks to be a welcome move by the government as the electric vehicles and alternate fuel vehicle is likely to be eco-friendly whereas, advanced technologies will enhance the safety and customer experience,” said Santosh Meena, Head of Research at Swastika Investmart.
The scheme has two components — Champion OEM Incentive Scheme and Component Champion Incentive Scheme. It is open to existing and new investors who are not in industry. “Thus, promoting entry of new players in this auto sector and starting of new capacity building. It will also promote indigenous production of overall auto and auto components in existing ecosystem and push automobile related exports from India. This scheme would start a fresh cycle of investment and employment that took a serious hit after the pandemic outbreak,” said Aprajita Saxena, Research Analyst at Trustline Securities.
She further said PLI scheme of drone would definitely nurture this niche & strategic industry domestically going forward.
Reacting on the above news, stock of many auto and auto-components makers rallied. The Nifty Auto index gained 0.86 percent as Tube Investments, Ashok Leyland, Tata Motors, Bharat Forge, Balkrishna Industries and Bajaj Auto gained 1-3.6 percent.
Motherson Sumi Systems rallied 2.84 percent, Jamna Auto was up 6.25 percent, Varroc Engineering gained 20 percent and Minda Industries was up by 0.26 percent.
“It is definitely a good move from the government with intention to make India a manufacturing hub. It will create huge jobs, attract lot of investment, boost infrastructure and new capex will be created,” said Siddhartha Khemka, Head – Retail Research at Motilal Oswal Financial Services.
Stocks to Benefit and Top Picks
Auto sector has been underperforming for last three months due to demand-supply issue and earlier due to intermittent lockdowns by states to control the spread of Covid-19, which clearly dented investors’ sentiment.
The Nifty Auto index fell 1.5 percent in last three months and several stocks fell in double digits, underperforming all the key sectoral indices. But experts feel this is the great opportunity to buy and accumulate stocks.
“Under the auto component PLI scheme, a total of 22 components will be covered such as battery electric vehicles, hydrogen fuel cell vehicles, advanced automotive technology, vehicle aggregates of 2-wheelers, 3-wheelers, passenger vehicles, commercial vehicles, and tractors, etc. However, the scheme does not cover the conventional automotive makers and would focus on advanced automotive technologies,” said Santosh Meena, Head of Research at Swastika Investmart.
According to Santosh Meena, stocks such as Jamna Auto, Varroc Engineering, GNA Axles, Pricol, Sona BLW, Motherson Sumi, and Minda Industries are likely to be the beneficiaries, while Aprajita Saxena feels Motherson Sumi, Minda Industris and Lumax Industries are beneficiary of this move.
Rahul Sharma, Co-Founder at Equity99 said their top picks in the sector are M&M, Tata Motors & Hero MotoCorp.
“Currently auto sector is dealing with supply-demand issue including semi conductor shortages, but this is very good news and we have positive view on the sector with three-month perspective. We are bullish on Hero MotoCorp, Bharat Forge and Bosch,” said Sanjiv Bhasin – Director at IIFL Securities.
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