Manufacturing companies may lead the next rally; here’s what investors should keep in mind

Manufacturing sector is likely to emerge as wealth creators and may lead the next round of rally, according to Emkay Investment Managers (EIML). The financial services firm believes that the structural changes in 2018-21 are reminiscent of a lot of things that happened prior to the boom cycle witnessed during 2003-06. The corporate tax rate, clean-up of balance sheets, and declining cost of borrowing indicate a cycle witnessed post-2002.

The government of India’s PLI scheme aims to provide nearly Rs 2.4 lakh crore worth of incentives over the next 5 years. With the lion’s share going to electronics, auto components, and pharma the incremental capex is likely to go to the less capex-intensive sectors.

According to EIML, PLI scheme has the potential to add nearly 4 per cent to GDP per annum in terms of incremental annual revenues. The domestic consumer was missing in action for almost five years due to multiple reasons like demonetisation, GST and Covid, among others.

“The discretionary income of Indian consumers is likely to rise from FY23 to FY27,” EIML said.

At present, manufacturing companies are adding capacities due to the robust returns. The registration of manufacturing companies has shot up to the highest ever in the last seven years.

According to EIML, the cash return on capital employed was the highest in FY22. The current difference between cash ROCE and comparable investment is one of the highest. The attractiveness of cash returns coupled with robust capacity utilization (CU) has put manufacturers on the front foot.

At the same time, China is facing significant pushback. They are facing disruption in the supply chain due to Covid -- manufacturing of goods as well as shipping is affected. The developed nations have imposed anti-dumping duties on a lot of Chinese goods. On the other hand, the rupee depreciation against Yuan is making India more competitive. “The key beneficiaries of this are likely to be auto and auto components, textiles, chemicals, and capital goods,” EIML said in a report.

Speaking at the webinar, Vikaas M Sachdeva, CEO, Emkay Investment Managers said, “We expect the manufacturing sector to become the mainstream investment theme.  In the medium to long term we expect a higher allocation of investments exposure from the funds. After a long hiatus, manufacturing companies are likely to be the wealth creators, leaders of the next rally in the markets.”

Sachin Shah, fund manager, Emkay Investment Managers Ltd said, “The current financial matrix as well the policy support is best suited for the manufacturing companies to outperform the broader markets. China+1 is a big thing to watch out for. This is the right time for the Indian manufacturing companies to make a mark at the international level.”
 

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