Is Indian manufacturing sector the next big investment opportunity?

Budget 2024 has put a spotlight on manufacturing, with several measures aimed at boosting employment and skilling in the sector. It’s clear the government sees manufacturing as crucial to achieving Viksit Bharat status by 2047. But this emphasis on manufacturing isn’t entirely new. Remember the infrastructure boom of 2006-2007? 

Today, India’s manufacturing sector stands at $467 billion, making it the fifth largest globally, ahead of countries like the UK and South Korea. However, we’re still trailing Japan and Germany, while China’s sector is about ten times larger. The question is: does this represent a genuine investment opportunity, or are we getting ahead of ourselves?

Let’s look at some hard facts to get a clearer picture. Manufacturing-themed mutual funds have delivered good returns over the past year, with an average return of 60.70%. The top performer, ICICI Prudential Manufacturing Fund, boasted a 68.08% return. Even the laggard of the pack, Kotak Manufacture in India Fund, managed a respectable 53.66%. These numbers are enough to make any investor sit up and take notice.

India’s rise as a manufacturing hub 

In the last few years, India has managed to position itself as an increasingly important player in global manufacturing. The Modi government’s “Make in India” initiative, launched in 2014, set the stage by aiming to transform India into a global manufacturing hub. This was followed by the “Aatmanirbhar Bharat” campaign and the introduction of Production Linked Incentive (PLI) schemes across various sectors. 

These policy initiatives have started bearing fruit. In fact, in the last five years, India has seen a rise in foreign technical partnerships, particularly in sectors like mobile phones, electronics, and food processing, with the US, Germany, and Japan being major technology transfer partners. 

And as they say, proof is in the pudding. Tech giants are making significant moves: 

Apple plans to build over 50 million iPhones in India in the next couple of years. 
Foxconn, one of Apple’s key suppliers, announced a $1.5 billion investment in India. 
Google will manufacture Pixel 8 phones in India with Dixon Technologies. 
Micron became the first major global semiconductor company to establish a base in India. 

These developments are not just isolated events but part of a broader trend. The HSBC India Manufacturing Purchasing Managers’ Index (PMI) reached a 16-year high of 59.1 in March 2024, indicating strong expansion. In 2023-24, India achieved record merchandise exports of $778 billion, according to Commerce Ministry data.  

Investment landscape and performance 

Currently, there are nine manufacturing-focused mutual fund schemes available in India, four of which were recently introduced to the market. 

These funds have shown impressive performance across various timeframes. For instance, the Kotak Manufacture in India Fund delivered 32.02% returns in two years, while the ICICI Prudential Manufacturing Fund led with 26.96% returns over five years. It’s worth noting that these funds have outperformed larger market indices such as the Nifty 500 and Nifty 500 Multicap across different time periods.

A Cautionary Tale? 

Perhaps. Because while these numbers are undoubtedly exciting, they also raise a red flag for those of us who remember the infrastructure boom. The infrastructure hype of the late 2000s left many investors nursing heavy losses. 

Will history repeat itself?  

There are some key differences to consider. Unlike the infrastructure boom, which relied heavily on future projections, the manufacturing theme is grounded in more immediate potential and tangible results. The sector’s diversity provides a degree of resilience that the infrastructure boom lacked.  

But there are challenges in this sector as well. The manufacturing sector’s contribution to GDP still lags at the targeted 25%. India faces stiff competition from countries like Vietnam and Mexico in attracting global investments. Moreover, the success of government initiatives like the PLI schemes has been uneven across sectors. Valuation is another key concern. Many manufacturing stocks are trading at significant premiums, which could limit future returns. 

So, should investors jump on the manufacturing bandwagon? 

I believe in a balanced approach. While the sector presents exciting opportunities, it shouldn’t come at the expense of overall portfolio diversification.  

For risk-tolerant investors, a dedicated manufacturing fund might be worth considering. However, most investors might be better served by diversified funds that provide exposure to manufacturing alongside other sectors. It’s worth noting that many broad-based funds already have significant exposure to manufacturing-related stocks. 

Timing is also crucial. Thematic funds are typically cyclical in nature, and getting the entry and exit timing right is challenging. Investors need to be prepared for potential volatility and have a long-term perspective. Investors should look out for signs of unsustainable valuations or over-reliance on government incentives. Because sustainability of the manufacturing boom remains uncertain. 

(The writer is Director and Founder, Valtrust Capital, a bespoke asset management solutions provider)