PV Makers Face Near-term Returns Pressure Amid Rs 3.5 Tn Capex Push
India’s passenger vehicle sector is entering a structurally strong but execution-sensitive investment cycle, with automakers expected to invest Rs 3.2 trillion-Rs 3.5 trillion between FY26 and FY30 to accelerate electric vehicle adoption, expand exports and tap premium demand, according to a report by India Ratings and Research.However, the ratings agency warned that returns are likely to remain under pressure in the near term as capital deployment outpaces demand growth, particularly in the electric vehicle (EV) segment, where adoption remains low and charging infrastructure gaps persist.
“The Indian PV sector is currently in the midst of a structurally driven capex cycle, led by EV transition and export scale-up, with investments increasingly front-loaded relative to demand,” Shruti Saboo, Director, Corporate Ratings at India Ratings and Research, said in the report released on Thursday.
The report said 60-70 per cent of planned investments would be directed towards EV platforms, battery technology and ecosystem development, underlining the industry’s long-term shift towards electrification.
India’s top five passenger vehicle original equipment manufacturers (OEMs) account for more than Rs 2 trillion of the planned investments, with execution likely to be phased and linked to demand visibility.
The sector’s annual capital expenditure has already increased sharply to Rs 644 billion in FY25 from Rs 259 billion in FY22, even though capex intensity moderated to 6-8 per cent of revenues in recent years from 9-10 per cent during FY15-FY20, the report said.
India Ratings and Research said return on capital employed (ROCE), which remained healthy at 15-20 per cent during FY23-FY25, could moderate in the near term as companies invest ahead of earnings generation.
The agency expects medium-term returns to improve once EV volumes scale up and operating leverage benefits emerge.
The report also highlighted exports as a key structural growth driver supporting the investment cycle. Passenger vehicle exports accounted for 18.7 per cent of volumes in FY26, growing at a compound annual growth rate of around 12 per cent between FY23 and FY26.
India’s emergence as a manufacturing hub for small cars and utility vehicles across emerging markets is prompting automakers to build globally compliant and flexible production lines capable of catering to both domestic and overseas demand, the agency said.
At the same time, India Ratings and Research cautioned that capacity additions would temporarily outpace demand growth. The industry is expected to add 3 million-3.5 million units of production capacity over an existing base of 6.1 million units.
Leading OEMs currently operate at utilisation levels of 60-85 per cent, but utilisation rates are likely to soften as new capacities come online.
The report noted that several automakers continue to invest despite sub-50 per cent utilisation levels, indicating that investment decisions are being driven more by EV preparedness and technology transitions than immediate demand visibility.
India Ratings and Research said the sector’s strong balance sheets would help absorb elevated investment commitments without materially weakening credit profiles.
As of FY25, net leverage remained at negative 0.8 times, while cash flow from operations to capex stood at around 2.4 times, showing strong internal funding capacity.
The agency said investments would largely be funded through internal accruals, equity infusions and parent support, reducing dependence on external borrowings.
Government incentives under the Production-linked Incentive (PLI) scheme are also expected to support project viability. The Rs 259 billion PLI-Auto scheme has approved 82 companies with committed investments of around Rs 357 billion as of December 2025, although only Rs 23.8 billion in incentives had been disbursed by February 2026.
Despite the investment momentum, EV adoption remains the biggest risk to returns, according to the report.
Electric vehicles currently account for only 3-4 per cent of passenger vehicle volumes in India, constrained by limited charging infrastructure, especially outside urban centres.
The report said delays in charging ecosystem development could lead to underutilisation of EV-dedicated capacities and slower return generation.
India Ratings and Research also flagged the underdeveloped domestic EV supply chain, particularly battery cells, which account for 35-40 per cent of EV costs and are still largely imported.
The agency maintained a stable rating outlook on most passenger vehicle OEMs for FY27, supported by strong liquidity and conservative leverage, while continuing to monitor EV execution risks, utilisation pressures and funding strategies.
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