The booming Indian economy offers opportunities in manufacturing, IT, pharma & consumer discretionary
Authored by Mrinal Singh, CEO & CIO of InCred Asset Management Private Limited
Through a long and arduous journey of political reforms and economic upheavals, India has transformed itself into an ecosystem capable of sustained growth over the next decade. Rising from a sub-par growth phase between 2018 and 2022, India is now at the cusp of its strong expansion journey, and this ambition is fuelled by the government's focus on infrastructure and manufacturing and its robust initiatives towards Digital India. Given the evolving geopolitical landscape and India’s enabling policies, a set of global majors across sectors such as chemicals, pharmaceuticals, technology, manufacturing, and auto are turning their eyes towards the country. Coupled with the steady development in rural India, these factors bode extremely well for the domestic growth narrative, making this the perfect time to invest in its potential.
Rural India Set for Rise
Considering the government’s keenness on enhancing rural infrastructure and social structures and the volume recovery in sight, there is a strong possibility of growth in the region acting as a positive surprise. Further, the low grains inventory with Food Corporation of India, the above-average increase in Kharif Minimum Support Price, and the expectations of a strong Rabi crop are expected to work in tandem to empower rural India significantly. In this evolving scenario, management commentary from companies is further boosting the sentiment, with the former stating that rural market volume, which had previously plunged, has turned positive in the last quarter of the financial year 2023. The dampening in inflation is also expected to boost rural growth in the coming period, in turn driving domestic economic growth higher.
Right time to invest
As the Indian economy scales new benchmarks of growth while maintaining its position as the fastest-growing major global economy, we are witnessing strong investment opportunities across themes and sectors such as rural consumption, healthcare, capital expenditure revival, urban discretionary, and technology and telecommunications. Government and private capex are expected to bolster the economy with the estimated capex compounded annual growth rate between FY23 and FY26, likely to come in at a robust 16 per cent, as against 6 per cent in FY10 to FY20[1]. A majority of the Production Linked Incentive scheme capex is being deployed in pharmaceuticals, mobile phones, and solar PV modules, with USD 39 bn being the potential spend in FY24E-26E across these sectors[2].
Consider bottom-up opportunities!
Accordingly, this is the right time to look for bottom-up opportunities in selective sectors while considering mean reverting stocks as likely sources of generating alpha. Given the market outlook, we are strongly bullish on sectors such as manufacturing, IT, pharmaceuticals and healthcare, and consumer discretionary. For instance, the healthcare sector is indicating strong optimism across verticals such as Branded Domestic Business, which entails a high margin, low capex, and steady cash flow nature, as well as Active Pharmaceutical Ingredients, Contract Manufacturing Organizations, and Contract Development and Manufacturing Organizations, with the China + scenario offering a considerable boost to API players. While China currently exports approximately USD 30 bn
worth of APIs, as against about USD 4 bn from India, even a 10 per cent shift in demand can double India’s API industry size, thus boosting the overall market and underlying stocks. Further, the hospital vertical is also expecting substantial expansion, as Indian hospital players have already incurred a huge capex to increase capacity, thereby leading to better margins, cash flows, and lower debt. With the capex phase largely over, this is the best time to monetize on the vertical.
Given these positive triggers, the Indian economy is set for a growth cycle from a long-term perspective.
[1] Jefferies Estimates, Company Data, Ministry Documents
[2] Jefferies Estimates, PIB, RBI, CMIE
Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ