Larsen & Toubro, Bharat Electronics, Hindustan Aeronautics, Suzlon Energy, APL Apollo Tubes and Siemens India - these are just some of the major industrial stocks in India that are?witnessing a tectonic shift towards them, in a sector which has long been seen by equity investors as lucrative. But what is the?reason behind the $125 billion boost which India's infra sector stocks have received this year??
It's all happening amid the?Indian government's plan to outrun China?and transform India¡¯s economic model into one driven by manufacturing rather than consumption. This is what is creating a tailwind for infrastructure and heavy-industry companies. With a road, airport, tunnel, metro or power facility under construction almost everywhere in India, the nation-building push is luring investors to the sector, as per Bloomberg.
The S&P BSE Industrials Index ¡ª a gauge that includes makers of bridges, helicopters and wind turbines ¡ª has surged more than 52% this year, boosting the combined market value of its 214 members by about $125 billion. That¡¯s beaten an advance of about 7% in the benchmark S&P BSE Sensex in 2023.
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Industrial stocks are in a sweet spot as India¡¯s economic transformation kicks into high gear ahead of next year¡¯s general elections and global companies pivot to the nation as part of the China-plus-one strategy. Tim Cook-led Apple, on the other hand, is expanding production in India while Tesla is closing in on an agreement that would allow it to set up a factory in the country within two years.
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¡°There was broad consensus among investors that India¡¯s capex cycle is on an upswing,¡± Jefferies Financial Group Inc. analysts Lavina Quadros and Koundinya Nimmagadda wrote in a Nov. 22 report based on the feedback they gathered from meetings in the US. ¡°Earnings growth in India industrials is leading investors to go lower down in market cap for ideas.¡±
A combination of corporate tax cuts, labour law reforms and production-linked incentives have made manufacturing in India more competitive, said Hiren Dasani, Singapore-based managing director at Goldman Sachs Asset Management.?¡°These factors cumulatively have led to a sharp increase in the order book and revenue growth visibility for many industrial stocks, underpinning their outperformance,¡± he said.
Order books for some companies are swelling to record highs, buoyed by rising government outlays as well as a budding housing boom in India. Capital spending has also contributed to double-digit volume growth in the?steel and cement sectors.
¡°The visibility is high¡± for the infrastructure sector¡¯s growth, while ¡°there is still a lot of stress¡± on the low-income consumers who are squeezing their expenses, said Singapore-based Vikas Pershad, Asian equities portfolio manager at M&G Investments, as per the report.?He has been overweight on Indian stocks most exposed to capital spending and underweight broadly on consumer staples.
As per the Bloomberg report, India is spending big on infrastructure with an aim to make India a developed nation by 2047. India is tipped to become the third-biggest by 2027, according to IMF estimates.
PM Modi-led administration announced a $1.2 trillion program last year to ease India¡¯s notorious bottlenecks, in addition to another initiative to build a network of roads and highways. It has also proposed to scale up capital spending by more than a third to Rs 10 trillion ($120 billion) in the year ending March 2024.
Policy continuity is crucial for achieving these goals, and that makes the upcoming national vote ¡ª which is likely to have a bearing on economic policy and reforms ¡ª an important event for investors. Some strategists have warned of a selloff in the market should PM Modi¡¯s ruling party face a surprise defeat.
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