Delhi EV Policy 2026 approved by cabinet, with the ICE phase-out timetable becoming the core risk

Overview

This report interprets the impact on the auto industry after Delhi EV Policy 2026 was approved by the cabinet. Through subsidies, tax and fee exemptions, charging infrastructure buildout, and restrictions on new ICE vehicle registrations, the policy promotes electrification of two-wheelers, three-wheelers, small commercial vehicles, and school buses in Delhi. Morgan Stanley believes that Delhi itself accounts for a limited share of national ICE two-wheeler and three-wheeler sales, and consumers may also purchase vehicles across state borders, so the direct impact on OEM short-term earnings is limited; however, if the policy is emulated by other cities or states, it will become an important valuation risk for India's traditional ICE business.

Core views

The core views are: first, Delhi's policy is the first to set a clear phase-out timetable for ICE 2W, 3W, and sub-3.5-ton N1 vehicles, making the policy signal stronger than simple subsidies alone. Second, the short-term earnings impact is limited because Delhi's sales contribution is low and some OEMs already have EV products. Third, valuation risk may be greater than EPS risk, especially in motorcycles where EV substitute supply is insufficient, making the success of Eicher Motors / RE electric motorcycles more important. Fourth, the report expects dealers and OEMs to push for delayed implementation; Chandigarh had previously proposed an ICE two-wheeler ban and then postponed it to November 2027. Fifth, reducing transport emissions should not rely only on bans on new vehicles; scrappage of older vehicles and battery cell localization are also key policy variables.

Analysis framework

The report uses a combination of policy clause breakdown, estimation of OEM sales exposure in Delhi, assessment of EV product substitution capability, and judgment on the spillover risk of similar policies. It focuses on comparing Delhi EV Policy 2026 across vehicle categories in terms of implementation timetable, subsidy strength, Delhi sales share, and each OEM's relative position in the EV market.

Methodology notes

• Policy impact analysisMapping policy clauses to industry exposure

  Map ICE phase-out timing, EV subsidies, and infrastructure investment to the 2W, 3W, PV, and SCV submarkets

  The report first identifies policy constraints and incentives, then uses Delhi's share of each OEM's domestic sales to judge direct earnings impact, and uses policy replication risk to assess valuation impact.

• Company exposure analysisRegional sales share and product substitution capability

  Compare each OEM's share of Delhi ICE sales, EV market share, and existing EV product supply

  The higher the Delhi sales share and the weaker the EV substitution, the greater the policy implementation and valuation pressure faced by the OEM; OEMs with existing EV products can partially offset this.

• Risk scenario analysisPolicy template diffusion risk

  After local policies are replicated by other cities or states, localized risks may turn into nationwide industry risks

  The report clearly points out that the local impact in Delhi is small, but if similar policies become a template for other cities, this will be a key risk that needs continuous monitoring.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Hero MotoCorp Ltd (HROM.NS)

  Indian two-wheeler OEM, affected by 2W ICE registration restrictions and EV migration

  Strengths

  Already has EV products; Delhi ICE 2W accounts for about 2.3% of domestic sales, with relatively lower exposure than RE and TVS.

  Weaknesses

  Hero has a 26.5% share of the total 2W market in Delhi, but only an 11.1% share in the EV market, with EV share below its overall market position.

  Comparison

  Compared with TVS and RE, direct Delhi ICE sales exposure is lower; compared with Bajaj, the total 2W volume in Delhi is larger.

  Risks

  If other states replicate the policy and EV share gains remain insufficient, valuations of the traditional 2W business may come under pressure.

• Bajaj Auto Ltd. (BAJA.NS)

  Two-wheeler and three-wheeler OEM, with exposure to 2W ICE and CNG 3W

  Strengths

  Already has EV products; Delhi ICE 2W accounts for about 1.3% of domestic sales, so direct 2W exposure is relatively low.

  Weaknesses

  CNG 3W accounts for about 2% of Bajaj's local 3W sales in Delhi, and the 3W registration restrictions still warrant attention.

  Comparison

  Delhi 2W exposure is lower than Hero, TVS, and RE; but in the 3W segment, the path of policy impact is more direct.

  Risks

  3W and N1 vehicles will be subject to earlier implementation from 2027, and if enforcement is strict, CNG 3W-related business will face substitution pressure more quickly.

• TVS Motors (TVSM.NS)

  Two-wheeler OEM, affected by Delhi 2W policy and EV substitution

  Strengths

  Already has EV products, with a 16.5% market share in Delhi's EV 2W market, providing some hedging ability.

  Weaknesses

  Delhi ICE 2W accounts for about 3.5% of domestic sales, representing relatively high exposure among major two-wheeler OEMs.

  Comparison

  Its EV market share is higher than Hero and Bajaj, but its Delhi ICE sales exposure is also higher.

  Risks

  If the policy spreads to other cities, both traditional ICE sales and valuation multiples may come under pressure at the same time.

• Eicher Motors Ltd. (EICH.NS) / RE

  Motorcycle OEM, specifically identified in the report as needing successful EV products

  Strengths

  Clear brand and premium motorcycle positioning, and has already launched electric motorcycles.

  Weaknesses

  Delhi ICE 2W accounts for about 3.9% of domestic sales, while its Delhi EV 2W market share is 0.0%; the motorcycle segment currently lacks strong EV substitutes.

  Comparison

  Among 2W OEMs, RE has the highest Delhi ICE exposure and the weakest EV substitution base.

  Risks

  If its electric motorcycle products are not successful, policy diffusion will significantly increase its medium- to long-term transition and valuation risk.

• Maruti Suzuki India Limited (MRTI.NS), Tata Motors Passenger Vehicles Limited (TAMO.NS), Mahindra & Mahindra (MAHM.NS), Hyundai Motor India Limited (HYUN.NS)

  Passenger vehicle OEMs, indirectly affected by EV PV tax exemptions and urban emissions-reduction policies

  Strengths

  The policy's main mandatory targets are concentrated in 2W, 3W, and N1 vehicles, so PVs face limited short-term impact from mandatory phase-out.

  Weaknesses

  Delhi PV accounts for about 4.2% of national PV sales, and reassessment will be needed if the policy expands to more vehicle types or regions in the future.

  Comparison

  Compared with 2W and 3W, PVs are currently more affected by tax exemptions and EV demand guidance rather than a direct sales ban timetable.

  Risks

  EV PVs below Rs30 lakh enjoy road tax and registration fee exemptions, which may change price competition and product mix in the segment.

• Amara Raja Batteries Ltd. (AMAR.NS), Exide Industries (EXID.NS)

  Battery-related companies, benefiting from the themes of battery cell localization and EV volume growth

  Strengths

  The report emphasizes that India needs battery cell localization to ensure energy security as it expands EVs.

  Weaknesses

  This report does not provide specific company order, capacity, or earnings estimates.

  Comparison

  Compared with OEMs, battery companies are driven more by EV penetration rates and the direction of localization policy.

  Risks

  If EV volume growth is slower than policy targets, or if battery cell localization advances less than expected, the realization of the theme may be delayed.

Key data

• ICE phase-out timetable3W and N1 vehicles: 2027-01-01; 2W: 2028-04-01Only EVs will be allowed for newly registered vehicles, and school bus fleets must reach 30% EV penetration by 2030-03-31.
• Policy incentive scaleRs70bn in direct incentives; Rs80bn in indirect incentives and infrastructure investmentThe policy also plans 32k charging points citywide and provides a 100% exemption from road tax and registration fees for eligible EV PVs.
• Direct subsidy for E2WMaximum Rs30k in the first year, maximum Rs20k in the second year, maximum Rs10k in the third yearThe subsidy is calculated by KWh and declines year by year.
• Subsidies for E3W and EV SCVE-Rickshaw first year Rs50k; EV SCV N1 first year Rs100kSubsidies decline in the second and third years to E-Rickshaw Rs40k/Rs30k and EV SCV N1 Rs75k/Rs50k, respectively.
• Delhi ICE 2W as a share of domestic salesRE 3.9%, TVS 3.5%, Hero 2.3%, Bajaj 1.3%The report uses this to conclude that the direct EPS impact is limited, though RE and TVS have relatively higher exposure.
• Delhi EV penetration rate2W EV penetration 6.9%; 3W EV penetration 87.9%Three-wheelers are already highly electrified, making policy changes more sensitive for traditional ICE two-wheelers.
• Delhi total sales shareTotal 2W is 2.6%, total 3W is 5.2%, total PV is 4.2%Delhi accounts for a limited share of the national market, and consumers may buy vehicles in neighboring states.

Impact & implications

The investment implication is that, looking at the Delhi market alone, the policy has a limited direct impact on the earnings of listed OEMs; however, the policy signal reinforces the preference of India's urban governance authorities for EVs and emissions reduction, which may pressure valuation multiples for ICE businesses and push the market to reassess each company's EV products, channel response, motorcycle electrification capability, and battery localization positioning. For investors, the focus is not just on lost sales in Delhi, but also on whether the policy spreads, whether implementation is delayed, and whether the motorcycle segment—where strong EV substitutes are lacking—can develop scalable products.

Risks

• Delhi's policy is replicated by other states or cities, expanding localized sales risk into a nationwide policy risk.
• Strong opposition from dealers and OEMs may lead to delayed implementation, similar to the case where Chandigarh's two-wheeler ban was postponed.
• The motorcycle segment lacks strong EV substitutes, which may hinder consumer migration or increase OEM transition pressure.
• Consumers may purchase vehicles in neighboring states, weakening the effectiveness of Delhi's local policy and increasing implementation complexity.
• If only new vehicles are restricted while older vehicles are not scrapped sufficiently, the improvement in transport emissions may fall short of expectations.
• Insufficient battery cell localization may create energy security and supply chain risks.

What to watch

• The final detailed rules of Delhi EV Policy 2026, implementation dates, and whether delays are introduced.
• Actual enforcement of new registration restrictions for 3W and N1 vehicles in January 2027 and for 2W in April 2028.
• The intensity of opposition from dealers, OEMs, and industry associations to the ICE phase-out timetable.
• Whether other Indian cities or states adopt similar ICE phase-out policies.
• Sales, product feedback, and channel rollout of Eicher Motors / RE electric motorcycles.
• Changes in EV 2W market share for TVS, Bajaj, and Hero in Delhi and nationwide.
• Progress on incentives for scrapping older vehicles, construction of 32k charging points, and battery cell localization policy developments.