Time for India to Step Up
In the 1980’s both India and China had approximately the same GDP. However, the rest is history, with China benefiting from developing an expertise in manufacturing and developing scale to provide for their own needs as well as for the rest of the world. As a result, China’s GDP growth averaged 13.0% (nominal since 1987), whilst India’s was 7.8% over the same period. That is not to say that India languished in its growth achievements. However, a focus on services led to a slow ascent of GDP and GDP per capita.
India Avenue Investment Management is hosting a Virtual Conference (Wednesday 26th August at 2.30pm) on India’s Manufacturing Opportunity on this very topic.
Manufacturing is now around 17% of GDP in India, with a Government objective to achieve 25% by 2025. India’s main export industry so far has been IT outsourcing and Generic Pharmaceutical manufacturing as well as Refined Fuels, Polished Diamonds, and textiles.
In overall terms, India’s exports account for 2.9% of its overall GDP – hardly a significant exporter to the rest of the world when it comes to goods. However, certain industries are illustrating greater growth potential and are likely to take on greater significance in the post COVID era. Medication mixes and equipment, light vessels, electrical products, ceramics, chemicals and phone devices are all growing in double digits.
China is approximately 26% of global manufacturing, around 9x as large as India despite India being the 6th largest manufacturer globally. There are not many countries which have the potential to match China’s expertise, scale and price when it comes to manufacturing. However, given the current tension and lack of diversity, most countries are seeking to diversify their supply chain. Whilst replacing China is unlikely in the medium term, it provides an opportunity for India to increase its share, with even a small incremental change (say from 3% to 5% of global manufacturing) which would nearly double India’s manufacturing from around US$400bn today to over US$700bn assuming no growth in global manufacturing. This will no doubt push India's rank up and also have a profound impact on the Indian economy going forward.
Source: World Bank, India Avenue Research
The Modi Government since election in 2014 and re-election in 2019 has been seeking to increase India’s presence in manufacturing through its “Make in India” initiative and by setting up divisions like “Invest India” which promote foreign direct investment into India. Additionally, India’s improving ranking on the Ease of Doing Business World Bank survey is testimony to the region becoming more open to foreign capital, partnerships and joint ventures.
Over the last 12 months we have seen investments by Facebook, Google, Amazon, Foxconn, Apple and Samsung to name a few who seeking opportunities to participate in the amazing fundamentals of India as well as to pivot their manufacturing plans towards India.
It is our view that the Manufacturing theme in India is likely to be a decade long thematic due to these factors. It will have implication not only for India but its trading partners. Countries like Australia have an opportunity to accelerate the trading relationship. From an equity market perspective, the India Avenue Equity Fund holds exposure to the India manufacturing theme through its locally based (in India) adviser, Old Bridge Capital Management. In fact, Kenneth Andrade, Founder and CIO of Old Bridge will present his view on this thematic at the India Avenue conference.
Old Bridge’s view is that in the 1990’s India’s significant thematic was IT outsourcing, when valuations of IT stocks were close to 40x, prior to dropping to market multiples and below as growth normalised (post IT boom). From 2000-2007, Infrastructure and Commodities led the way with companies that typically trade at cyclical P/E multiples, trading closer to 20-25x before collapsing post the GFC as funding for infrastructure projects dried up and the commodity boom slowed.
Since the GFC we have witnessed strong returns from Consumption and Financials, which went from trading at market multiples to 50x for Consumption and 3xBV for Financials. Today the valuation of manufacturing companies of India does not reflect the opportunity which stands in front of them. When they do, it is likely that their P/E’s will be much higher than what it is presently.
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Mugunthan Siva is Managing Director of India Avenue, an Australian based boutique asset management company with offices in Sydney and Mumbai. He has over 25 years experience in Australia and is lead portfolio manager for the India Avenue Equity Fund.