Supply chain shift benefits India, says Nomura; bullish on RIL, BEL and more

India’s electronics sector contributes just about 3 percent to the GDP, lagging behind its peers.

India and Vietnam are reaping the benefits of the search for supply chain options outside of China, according to a report by Nomura, opening up new growth prospects.

“The shift in supply chains away from China has set in motion what economist Kaname Akamatsu called the ‘wild-geese-flying pattern’ of economic growth, whereby production shifts from the lead goose (advanced nation) to the next flock of geese (developing nations),” explained Nomura.

India is poised to become the largest beneficiary of this shift, receiving the most interest from companies seeking to set up or expand production facilities, according to the Nomura note. One major factor that has contributed to India gaining edge here is the large domestic consumer market, with existing projects across electronics (smartphones), automobiles, capital goods and semiconductor assembly as well as testing.

According to Nomura’s estimate, this trend should raise India’s exports from $431 billion in 2023 to $835 billion by 2030, at a CAGR of 10 percent.

“Equity opportunities are several across countries and sectors, but we are most excited about India. Investors need to be patient in the short term, but we expect a larger impact on fundamentals and more opportunities over time,” said the global brokerage.

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Sectors Driving Optimism

The central government’s ongoing policy thrust to boost manufacturing, along with the relocation of supply chains, could potentially emerge as a driver of growth for the economy and corporate earnings over the medium term.

Electronics: India’s electronics sector contributes just about 3 percent to the GDP, lagging behind its Asian peers. However, government initiatives like the Production-Linked Incentive (PLI) schemes, totaling around 20 billion over 5-6 years, aim to boost this industry.

Efforts to decrease reliance on Chinese imports, coupled with lower labour costs and a robust domestic market will create favourable conditions for growth in electronics manufacturing, said the report.

Autos: The government has set a long-term EV penetration target of 30 percent and is continuing to support EVs through multiple schemes, which is what the industry intends to capitalise on. India already has a strong manufacturing base for automobiles, and therefore auto makers are lining up a slew of EV-only model launches in the upcoming years.

Solar Energy: Solar is set to significantly outpace all forms of energy capacity additions over the coming decade, driven by improving economies of scale, decarbonisation commitments, China+1 diversification and favourable policy dispensation, according to Nomura.

Pharma: Nomura noted that the space was where manufacturing would rise a lot over the long run because of the strategic imperative to reduce dependence on China for raw materials, particularly in segments like anti-infective. India can also capitalise on the need of innovator companies to diversify contract research, development and manufacturing services away from China.

Defence: India is transitioning from its over-reliance on imported defence equipment and shifting to indigenous production with private sector's engagement. This is driven by streamlining defence procurement procedures, incentivizing local manufacturing under ‘Atmanirbhar Bharat’ program, and the Strategic Partnership model.

Import embargoes on specific defence items are driving local manufacturing and innovations, while new defence corridors in Tamil Nadu and Uttar Pradesh hoping to attract investment and further strengthen India’s self-reliance and defence capabilities.

Nomura’s Economic Outlook

Nomura is optimistic about a medium-term recovery in private capital expenditure, as the trend of manufacturing gathers pace in India. Long-term supply chain relocation is also expected to enhance the trade balance and reduce the current account deficit, boosting India's value addition and corporate earnings. This manufacturing growth will also positively impact consumption trend.

With improved corporate profitability, higher dividend payouts are anticipated, further supporting both consumption and earnings. Nomura projected 12 to 17 percent earnings growth for India's corporate sector in the medium term.

Among these spaces, the global brokerage is positive on Reliance Industries, Bharat Electronics, Exide, Sona BLW and Uno Minda.

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