PLI scheme makes component manufacturing for ACs more cost competitive, Ind-Ra

India’s recently announced Production Linked Incentive (PLI) scheme for manufacturing of components for air conditioners will provide an incentive of 4-6% on incremental sales of goods manufactured in India over a period of five years, according to a research note by India Ratings and Research released on Monday.

Earlier in April, the government announced its PLI scheme for manufacturers of air-conditioners, LED lights, and solar photovoltaic (PV). In white goods, firms that make either components or sub-assemblies in India are entitled to the sops. Those who carry out just assembly of finished goods will not qualify, according to a government note released then.

The PLI schemes were first announced last year, aiming to create global manufacturing champions in India and to encourage economies of scale to develop complete ecosystems for components in the country.

“The scheme for ACs will provide an incentive of 4-6% on incremental sales of goods manufactured in India, over a period of five years. The minimum investment varies depending on the nature of projects (i.e. large or small) as well as upon the nature of component. India’s high reliance on imports in the sector exposes companies to forex risks as well as supply chain disruptions, on account of dependence on select geographies. As such, the scheme is likely to see increased investments from various domestic and global players in the sector,” it said in its note.

Ind-Ra estimates the scheme has the potential to generate incremental revenues of Rs650-750 billion, by reducing dependence on imports. Factoring in the benefit derived from PLI, the agency expects that the cost of manufacturing in India could be 8-12% cheaper, depending on the component.

Within air conditioners, critical components such as compressors, condensers, blower motors and PCB circuits which account for 55%-60% of the total cost are largely imported, the research note said.

Several companies have tried to ease reliance on imports of components by setting up units for the same in India. But given the small size of the domestic air conditioner market—it makes little sense for manufacturers to invest in local units.

Indian Ratings, however, said it now expects large players to invest mainly to increase backward integration.

“However, in view of various incentives and policies launched by the government, Ind-Ra believes that the industry could see increased investments by large players mainly to increase backward integration. Some global players could also consider India as their alternate supplying destination. Large contract manufacturers, which account for around 40% of the total ACs manufactured in India, could also invest in this space as they are likely to achieve economies of scale faster than other players,” the note said.

However, it also flagged some challenges in the implementation and scale of the scheme.

The government has hiked the import duty on key raw materials used in the manufacturing of air conditioners such as copper, steel, aluminium, and plastic injection moulding components. Even if there is localisation of components, import of some raw materials such as specialised steel could increase, thereby increasing the cost of manufacturing of these components.

An increase in input cost could force manufacturers to increase the prices for end-consumers and hence impact the demand in the interim. Furthermore, the PLI scheme notification mentions the timeline for application as six months which might have to be extended as companies could take time to re-evaluate their business strategies amid the second wave of covid, it said. LiveMint

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