Up over 165 percent from a COVID-low of 293.69, hit in March 2020, brokerage house Emkay believes India’s manufacturing opportunity is a multi-decade story.
The brokerage sees a lot of promise in the Indian manufacturing opportunity. The sector is poised to grow at a brisk pace supported by favourable government policies, key beneficiaries of China+1, and the improving matrix within the players, it said. According to Emkay, BSE Manufacturing has grown at a faster pace than the key benchmarks and the same performance is likely to get replicated in the next few years.
It further stated that cash returns and robust capacity utilisation has put manufacturers on the front foot. Also, auto and ancillaries, textiles, chemicals, and capital goods are key beneficiaries of China+1. The brokerage advises investing in companies with a judicious mix of domestic versus export sales, adding that it is prudent to invest in companies with pricing power even if it’s delayed by a few months.
"India’s manufacturing sector is an idea whose time has come. The government’s thrust and Make in India, PLI scheme-like policies will continue to provide the required push for growth. We expect the sector to witness traction domestically due to the structural issues that were addressed. We also expect the sector to witness fund flows from overseas as the China+1 strategy takes on in full flow," said Krishna Kumar Karwa, MD, Emkay Global Financial Services.
A stellar performance by manufacturing companies in listed space
The brokerage noted that the Indian manufacturing sector has witnessed stellar growth in the past few years due to various reasons - the government’s thrust being the key to it. The sector was among the worst performing in terms of returns posted for the investors from FY15-19. They were in low single digits. However, due to the structural changes - the sector received the right push, it pointed out. Due to this, the sector’s performance has been better than its peers namely Nifty 500, Nifty Bank, Nifty 50, Nifty Services, and Nifty IT. The growth delivered from March 2021 has been in higher double digits, it highlighted.
The BSE Manufacturing index has gained 16 percent in the last 1 year and 14 percent in 2023 YTD. In comparison, the Sensex is up 10 percent in the last 1 year and 7.5 percent in 2023 YTD.
Constituents
In the last 3 years, all, except one (BPCL) constituent, in the BSE Manufacturing have given positive returns. Tata Motors has been the top performer, surging 392 percent in the last 3 years. Meanwhile, JSW Steel, Tata Steel, Grasim, Titan, L&T, Hindalco, M&M, ITC, Sun Pharma, and UltraTech Cement have also given multibagger returns in this period, rallying between 102 and 220 percent.
Nifty Manufacturing set to outperform benchmark peers
The brokerage also believes that the current setup bodes well for the sector to not only post double-digit returns but also outperform its broader benchmark peers for the next few years. China+1 will continue to benefit the sector for years to come, it added.
"Most of the growth elements have fallen in place for the sector. Local manufacturing by domiciled companies, and foreign companies looking at setting bases in India has accelerated growth. The big push is likely to come from the central and state governments in the form of infra projects of large scale," said Sachin Shah, Fund Manager, Emkay Investment Managers.
Government capex at 2x of historical averages
As per Emkay, the current government capex is seen at 2x of historical averages. Both central and state capex are significantly higher than the historical averages. As per the available data, the central + state capex is around 5.6 percent of GDP which was 2.8 percent of GDP pre-COVID 20-year average, it informed. The government capex is largely driven by building roads and railways infrastructure across the country. During the previous upcycle of 2003-08, the government capex grew by 23 percent CAGR, added the brokerage.
Key risks
"The manufacturing sector is capex-heavy in nature. The gestation period is long, often running for years and decades. The sector faces some risk in the form of hike in interest rates, liquidity, and a slowdown in the broader economy. Interest rate and liquidity risk are key risks but for the time being there are no major risks seen as the central bank is on a pause and is likely to start easing from CY24. Inflation which was showing signs of ebbing may see a spike. Vegetable and food inflation may rise due to the erratic monsoon season. This may lead to a spike in inflation, which will eventually force the RBI to hike rates. The central bank has made its stance on controlling inflation clear. Not only domestic but there is a global risk too as the tightening of balance sheets by global central banks may pose a risk to liquidity. Lastly, any slowdown or recession fears in the West may pose a growth risk to the sector," explained Emkay.
