Caught between a rock and a hard place in the global economic sphere, the latest second-quarter GDP figures left everyone fiscally flabbergasted. What truly stole the show was the remarkable boost in India's growth projections, majorly driven by its manufacturing sector, surging at an impressive 13.9 per cent. This stands in stark contrast to the 4.7 per cent in Q1FY24, perhaps a remarkable upturn in India's growth story.
However, the manufacturing segment has already been playing out the optimism on Dalal Street since the inception of 2023. The Nifty 50 index recorded a one-year return of 12.30 per cent, while the Nifty India Mfg index nearly doubled those results at (approx.) 23.62 per cent. As markets celebrated the positive Q2 GDP figures with all-time highs, the manufacturing stocks had already turned their turbulent road into fueling optimism for investors.
What cheered up the economy after the GDP estimates, was already quite visible in manufacturing stocks since the inception of this year.
Manufacturing Boost To Dalal Street
Rewinding a year back, the manufacturing sector’s growth in the second quarter of FY23 stood at a discouraging (-) 3.8 per cent. However, viewed from a yearly perspective, the sector concluded the year on a robust note, driven by a resurgence in demand. On the year-to-date basis, the Nifty Mfg Index clocked up a 27.51 per cent return. In 2022, Nifty Mfg index hardly surged by (approx.) 3 per cent.
In a year marred by geopolitical tensions, persistent inflation, and turbulent demand on the global stage, India's manufacturing sector defied expectations by exhibiting remarkable resilience. Despite the headwinds, India stood its ground, which was later reflected in the performance of manufacturing funds. Much of the green light in the sector can be attributed to policy certainty as the centre started ruling out PLI schemes.
Shreyash Devalkar, Head - Equity at Axis AMC, believes that in the current decade, there has been a noticeable improvement in the performance of the export and investment sectors of the economy compared to the previous decade.
“If manufacturing sector is going to contribute more to the GDP growth for next decade, it is expected to open long-term opportunity for overall manufacturing sector,” he said.
Diving into the numbers, there has been a steady increase in the AUM (Asset Under Management) of manufacturing funds reflecting the growing interest of retail investors and fund managers in this theme of investments. For instance, popular funds like ICICI Prudential Manufacturing Funds, Kotak Manufacture in India and Aditya Birla Sun Life Manufacturing Fund, collectively witnessed a robust 48 per cent average AUM increase compared to the previous year (Q2FY23).
Moreover, the Net Asset Value (NAV) of these theme-based funds witnessed a substantial increase throughout the current year. To give perspective, the NAV of ICICI Prudential Manufacturing Funds shot up to 27 (as of 6 Dec) from hovering around 19 last year.
For BoI (Bank of India) Manufacturing and Infrastructure fund, the NAV surged from around 34 last year to 48 (as of Dec 6).
In primary markets, there has been a notable uptick in initial public offerings (IPOs) within the manufacturing sector, that has fueled heightened investor attention. According to a report by EY last month, India has taken the lead globally in the number of IPOs so far in 2023. A good number of IPOs in the markets have been from the manufacturing sector.
However, despite the strong performance of market products associated with manufacturing, the number of thematic funds in this category remains restricted.
The valuation call
In contrast to the previous year, the manufacturing sector saw an upswing with increased production levels in Q2FY24. Government policies further contributed to this growth. However, when it comes to reaping the benefits of heightened investor confidence in the sector, limited activity is observed around the manufacturing theme.
"Manufacturing as a theme is surely very attractive from a long-term perspective. One concern is that there are more investors and less volume of stocks so the valuations of these stocks would shoot up. For funds, this is a challenge but I am sure maturity in this space would develop soon," said Deepak Chabbria, Founder and CEO of Axiom Financial Services Ltd.
A cause for concern also lies in the fact that a majority of SMEs that originated in the past year or two have been from the manufacturing sector. Recently, these SMEs have been under regulatory scrutiny due to escalating listing premiums and oversubscription issues in the preceding months.
Yet, optimistic figures have instilled confidence among analysts regarding the long-term attractiveness of the manufacturing theme.
Crafting a portfolio and segregating the right stocks with strong fundamentals is a common play for every sector. Be it any fund, a concrete investment maturity often materializes when investors gain a nuanced understanding and insight into a specific sector or theme.
"In the short term, there is some uncertainty over the manufacturing stocks because their valuations have shot up in the last one year. In a way, the low hanging fruit in manufacturing story has already been grabbed; however, for a long term play of 3-5 years, this is much more attractive for investors,” said Amar Ranu, Head - Investment Products & Insights, Anand Rathi Shares and Stock Brokers.
Much of the sector-wise exposure of manufacturing funds lies in auto, consumer & capital goods, healthcare, and other infrastructural goods. The road for growth of these non-service stocks primarily lies in strong demand and stabilized export figures.
The political outlook in the domestic sphere coupled with geopolitical notions such as the 'China plus one' business approach, holds the potential to enhance India's manufacturing story. However, the long-term perspective will predominantly hinge on the sector's earnings and growth trajectory.
(With inputs from Ayaan Kartik)