Daily Voice | This equity head is bullish on industrial space, here is why

The government's focus on capital expenditure and setting up the infrastructure is likely to drive broad-based economic growth. The growth of the manufacturing sector is positioning India to play a pivotal role in the global supply chains. Consequently, industries operating within the capital goods, industrial products, and infrastructure space are expected to experience favourable business momentum over the next five years.

India's digital revolution, which has gained momentum during and after the pandemic has and is expected to continue to influence the growth of various sectors.

Also read: Key events this week: India PMIs, US jobs report, Fed minutes, China inflation and more

Additionally, private consumption, which is a dominant part of the economy, is expected to exhibit robust growth, courtesy the fast clip growth anticipated in per capita income over the next five years. We believe this incremental income is likely to be allocated towards discretionary categories propelling businesses within this sector to achieve value creation for investors.

Given the growth trajectory and the subsequent surge in energy demand, the country is increasingly transitioning towards greater renewable energy generation. Companies operating in the renewable energy generation sector are well-positioned to capitalise on this transition.

Finally, this overall growth trajectory will necessitate support from a robust financial system. With stronger balance sheets and sufficient capitalisation, both leading banking institutions and non-banking financial institutions are well-positioned to finance India's economic growth and simultaneously reap significant profits from this upward trajectory.

Do you expect India to see a 7.5 percent growth if old-economy sectors are supported by new growth drivers?

We are not currently assuming 7.5 percent GDP growth as a base case. We are not factoring in a faster-than-estimated growth in India’s GDP in our internal assumptions. This is because the prevailing forecasts are already building a considerable outperformance of the Indian economy versus the developed as well as developing nations.

Also read: How HDFC and HDFC bank multiplied the wealth of MF investors

Having said that, there is a reasonable chance for the economy to surprise positively, driven by policy actions taken by the government.

Are you bullish or super bullish on building materials over the core real estate space?

We are quite positive on high-ticket consumption sectors in general, which also includes real estate. If you consider India’s per capita income on purchasing parity basis: we are at an inflection point in real estate. Post underperformance for almost a decade, our interactions are indicating that this sector is poised for above-average growth.

Do you see opportunities in the electronics manufacturing services industry?

Electronics is one of the large contributors to import bills for India. Considering the importance of the industry, the government came out with multiple production-linked incentive plans for the sector. The existing large consumer base within the country, increasing demand for electronics across the industries and potential to substitute imports make this an ideal area of growth from India’s perspective.

Also read: Bank of Baroda plans to divest up to 49% in credit card arm

Global businesses looking to diversify their manufacturing away from China have also found India an attractive alternative. Underlying business growth of 3x - 4x of GDP growth and high asset turns make these businesses an attractive opportunity for investors.

Do you think domestic capex cycle recovery is a key theme driving small and midcap outperformance?

We believe that a strong outlook on the economy is driving growth in multiple sectors, including private capex. We are seeing strong momentum in consumer-facing sectors, as explained above. India’s growing preference as a manufacturing destination is driving private capex and is likely to boost industrial activity. The financial sector will also play a vital role in supporting this growth.

Also, the small and midcaps underperformed the largecaps for the year ending December 31, 2022. So, the start of the year 2023 also had a favourable base for small and midcaps.

Hence, we see a multitude of factors attributable to recent outperformance in small and midcap in the last three to six months.

Also read: Midcap & smallcap stocks in these 3 sectors look quite attractive, says this investment advisor

What is your take on the industrial sector?

We are bullish on the industrial sector. The overall growth trajectory of India is linked to an increase in private capex in the country. The improving physical and digital infrastructure has equipped India to boost its manufacturing footprint in the economy and the world.

India is increasingly becoming a key player in global supply chains. Big credit goes to the government initiatives such as the Goods and Services Tax (GST), reduction in corporate taxes, ease of doing business and the Production Linked Incentive scheme for manufacturing, which have proven to be critical factors for this transition.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.