How India's Plan To Outrun China Has Given A $125 Billion Boost To Infrastructure Sector Stocks

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?

Why Are Infrastructure Sector Stocks Soaring?

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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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What All Is Helping India's Push Towards Outrunning China?

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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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How Are Analysts Reacting To This $125 Billion Boost?

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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.

What Effort Is India Making This Year?

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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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