Reformative Production linked Incentive Scheme- Chapter 1
Its China
At last, we are approaching the finale of 2020, as we meet with India’s lowest score ever in the test match against Australia in Cricket. Yet another setback! With too many horrifying incidences and too many wrangling controversies, we are set to start 2021 with positivity and enthusiasm. Even though this year had numerous harsh memories which could land up in our history books few years down the line, there were few glad tidings which could benefit India in perpetual term. Confused? Let me explain, which is the most common word heard throughout 2020 besides COVID-19. Its China! China has been a hot topic since years, though talks about it has rose to its peak in 2020.
World is envious of China, as they plan to pack their manufacturing baggage and drift outside it. India despite being renowned for our cheap labor, weren’t able to grab a mighty piece from the China Pie. A Nomura Group study showed that only three of the 56 companies shifting production out of China relocated to India; 26 went to Vietnam, 11 to Taiwan, and eight to Thailand.
Instead of whining over reasons, it was paramount to introspect what’s wrong with India? Solutions weren’t too arduous to decode, as “Ease of doing Business” is one such metric being considered by these business houses, and India was famed as a country of stringent laws difficult to solve. 2020 can be regarded as year of reforms to attract these global giants to invest in India. Right from corporate tax reduction, replacement of cumbersome 29 labour laws to mere 4 labour codes to Production linked Incentive scheme tracked India towards its righteous long-term goal. As I write this article, India has jumped leaps and bounds in Ease of doing business, from 130th in 2016 to mere 63rd in 2020 as can be said as an astonishing jump.
Where is the Manufacturing sector?
No country has gone from developing to developed without the expansion and success of its manufacturing sector. As the Cambridge University economist Ha-Joon Chang writes in Bad Samartians: “History has repeatedly shown that the single most important thing that distinguishes rich countries from poor ones is basically their higher capabilities in manufacturing, where productivity is generally higher, and more importantly, where productivity tends to grow faster in agriculture and service”
Every developed country in the world have noticed a smooth transition in their GDP contribution from Agriculture to manufacturing to service sector. Few of us are still in a dilution that a shift from agriculture to service sector (eg IT sector) directly in India, has us given some brownie points of transition, which can help us miraculously help us move closer to any advanced economy. Apologies to smash your dilution, but once a farmer migrates to look for a job, he might have not thought to crack through the service industry in which he requires specific technological skills, he would have rather prefer to head for a manufacturing job which is labour intensive. Last decade had been tough for manufacturing sector in India as its GDP share had been rolling in the wrong direction, it was 18 percent in the start of the decade, and as we reach 2020, we close it with 16-17%. Now compare with several countries in Asia, where manufacturing accounts for more than 20% of the GDP. In Thailand, it is 34%. In China, it is at 32%. In Malaysia, Indonesia and the Philippines, it is at 24%, 24% and 31% respectively. Hence, the Indian share in Global manufacturing has barely moved over the last few decades. Below table helps us to understand contribution:
Let’s introduce PLI scheme
As said earlier, these problems were known to all (BJP or Congress), but usually any policy which could creates reformative actions are highly politicized in India, therefore even after numerous attempts laws couldn’t pass through the parliament. But as I began this write-up specifying 2020 as a “the year of reform”, we have introduced one such policy which would be helpful for the propaganda of “Make in India” change if implemented correctly: Production Linked Incentive Scheme.
My intent here is not just brushing over this scheme, besides to locate probable listed multi-baggers benefiting though this scheme. However, there are very few publicly traded firms that could benefit from the programme. Shares of the few that are listed have already surged considerably on the announcement of these incentives. Analysts estimate that the scheme could add $144 billion to revenues of companies by FY27 and India’s exports could increase by $55 billion. Besides, these incentives are also likely to create 2.2 million jobs and see $22 billion of direct capital spending, according to an 11 December report by Credit Suisse India.
PLI was announced in 2 tranches, first tranch was announced on 1st April, a promise to allocate 51311 Crore INR in below 3 segments, later on success of the initial applications, 10 other sectors were bought into the scheme totalling the total outflow of 2 lakh crores INR.
Mobile Manufacturing and Specified Electronic Components
As a part of the National Policy on Electronics, the IT ministry had on April 1 notified a scheme which would give incentives of 4-6 per cent to electronics companies which manufacture mobile phones and other electronic components such as transistors, diodes, thyristors, resistors, capacitors and nano-electronic components such as micro electromechanical systems.
Division of 4-to-6% in a year wise manner, can be easily understood from the below table (Eligibility threshold criteria). I shall particularly emphasize on familiarizing yourself to PLI in this section itself, because Meity (Ministry of Electronic and information Technology) has clarified us on electronic goods on their plan to incentivize their stakeholders in a very simplified manner. Besides this, no other sector has informed us on division with such lucidity, therefore this sector could be considered as basis to understand all other sections.
There are 2 tables below one explaining investments and probable incentives to be received in years to come. Second on the eligibility criteria towards their global manufacturing revenue. Following are the takeaways from this:
· Incentives are output driven, mainly based on incremental revenue, not investments.
· Incremental sale eligibility for International companies is substantially higher than domestic companies, thus settling towards “Atmanirbhar Bharat”
· Eligibility criteria for global consolidated revenue (second table below) and selection of minimum number of companies does provides restraint for small cap companies to benefit from this venture, thereby only top 5-10 shall be selected.
· Incremental investments ensure Investment flowing throughout 5 years horizon, necessitating revenue growth throughout 5 years.
Below limits on Revenue have been further revised and increased as can be understood from the below link:
How will PLI work?
It’s always better to analyse with an example, as after 3 years of negotiations Apple is finally ready to start manufacturing plant via Foxconn, Wistron and Pegatron under PLI scheme. So, suppose Foxconn shall invest 750 crore INR (minimum) in setting up a green field manufacturing set up in India, no such benefit shall be received on its original cost of investment, instead presume in year 0 their revenue is 2000 Crore INR, and in year 1 their revenue rose to 6000 crore INRs (Incremental 4000 crore INR). Benefit here shall be on incremental sales of 4000 crore INR i.e 4000*6% i.e 240 crore INRs, same continues as per below table. Consider this as a variable pay given to employees, as today we are shifting from the traditional fixed salary structure by Public companies to variable pay bonuses depending on their performances.
Mobile phone manufacturing
Various companies which have been approved including iPhone maker Apple's contract manufacturers Foxconn Hon Hai, Wistron and Pegatron, apart from Samsung and Rising Star. Domestic companies whose proposals have been approved include Lava, Bhagwati (Micromax), Padget Electronics (Dixon Technologies) and UTL Neolyncs.
Below table helps us to summarize where India stands in terms of Mobile phone manufacturing today. Micromax had its time near earlier part of the decade with market share close to 20% (till 2014), as Chinese brands like Xiaomi entered the mobile manufacturing space disrupted all the Indian Brands. This sector faces disability of around 8.5% to 11% on account of lack of adequate infrastructure, domestic supply chain and logistics; high cost of finance; inadequate availability of quality power; limited design capabilities and focus on R&D by the industry; and inadequacies in skill development.
As a result, once the PLI scheme was announced, domestic companies started tasting Champagne on the cost of the beer. Micromax is set to venture on this junction as he announces 500 Crore INR investment. Dixon Technology proved its intent by increasing its stake in Padget Electronics to 100%.
In the listed space, I could just discover Dixon Technologies from this segment, this indeed proves how handicap we are in terms of manufacturing of Electronic goods. Never the less, I hope this PLI brings prosperity in this segment, and next time we enhance the listing space.
PLI scheme is extensive, and it shall take few more parts to dig deeper. I plan to dive on each segment and bring valuable inputs to all my readers. Below is the list of companies expressed or buzzed their interest on PLI, as we shall pick few of the companies from the PLI store to understand the probable opportunities and limitations in further parts of this series.
Consider below as a gift in case you prefer to study on your own! ??
Market values taken from Yahoo finance”
Return on Invested Capital (ROIC) is another financial metric that measures just how well a company generates revenue using the invested capital. It allows investors to determine the prospective returns that they get to earn from their investments in a company. Similar to ROCE, a high ROIC figure signifies that a company is highly efficient at generating revenue using the funds invested by the company’s investors.
Reference:
Vivek Kauls Book: India’s Big Government
https://pib.gov.in/PressReleasePage.aspx?PRID=1671912
Product Manager at Yokohoma Off-Highway Tires | Ex-Amazon | Ex-Coffee Day Beverages
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