'BSE Manufacturing Index will outgrow benchmark indices for next few years'

Auto and ancillaries, Textiles, Chemicals, and capital goods are key beneficiaries of China+1

Manufacturing companies continue to be an attractive investment preposition. 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, according to Emkay Investment Managers Ltd. (EIML), the portfolio management services arm of Emkay Global Financial Services.

EMIL is of the view that 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.

"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 (companies in the listed space) was among the worst performing in terms of returns posted for the investors from FY15-19 - they were in low single digits. Due to the structural changes - the sector received the right push. 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 21 has been in higher double digits," said Emkay.

From worst performing CAGR returns FY15-19 

To best performing (CAGR returns since Mar-21

Nifty Manufacturing set to outperform benchmark peers

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 thanks to the China+1 strategy, it added.

Coined way back in 2013, it is a global business strategy. China-Plus-One, or just Plus One refers to a strategy in which companies avoid investing only in China and diversify their businesses to alternative destinations. In the past, clear winners of the China-plus-one model have been the EU, Mexico, Taiwan, and Vietnam, across sectors such as machinery, automobiles, and transport and electrical equipment.  India, now is expected to significantly benefit from this strategy.

"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 Ltd.
 

Government capex at 2x of historical averages

The current government capex is seen at 2x of historical averages. "Both central and state capex are significantly higher than the historical averages.,: said Emkay.

As per the available data, the central + state capex is around 5.6% of GDP which was 2.8% of GDP pre-COVID 20-year average. 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% CAGR.

Data for the government capex as a % of GDP

Source: Ministry Notifications, EIML

The key risk for the manufacturing sector

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," said the Emkay note.

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.

" 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.