Axis Manufacturing Capex - Nov21

India strategy
Manufacturing resurgence
November 30, 2021 Strategy Update

 Several factors are aligning to boost India’s manufacturing output, triggering a private sector capital expenditure cycle. Massive
investments in infrastructure and policy changes over the last several years have considerably boosted productivity, enabling India
to catch up with its competitors.
 Indian manufacturers, especially in capital goods sector, have survived the challenging last few years with major efficiency, quality
and cost initiatives. The consequent improvement in competitiveness is now coming to fruition as India emerges as an alternate
source to China, both for exports as well as to substitute imports.
 Recent improvement in government finances is set to continue and credit growth will likely pick up. Not all is well though – high level
of unemployment remains a problem even as wage inflation for skilled jobs remains elevated.
Is India’s manufacturing set for long growth?

India was one of the few major economies to see acceleration in its manufacturing growth in five-year period just prior to the pandemic,
while the rest of the world slowed. Notably, India’s manufacturing GVA grew faster than China’s in that period, after a long time. India also
gained share in global trade of manufactured goods, especially in machinery, steel and chemicals (ex-pharma). These trends took a
temporary halt during the lockdown but seem to have further entrenched as the world emerges out of the pandemic. India’s manufactured
goods exports grew 42% in CY21YTD, compared to global growth in trade of 27%. Trade deficit with China also reduced by 80 bps over
FY16-21. The signs are all there.
Infrastructure improvement helps drive down macro cost and improves reliability
Over the last 20 years, considerable investments have gone into improving the physical infrastructure, resulting in significant changes in
cost and reliability of major factors. Average distance travelled by trucks has increased from 250-300 kms 5 years ago to 450-600 kms
now, both due to improving quality of roads as well as removal of check posts post GST. Power availability has improved substantially since
the dark days of 2012/3 with peak deficit averaging less than 1% compared to c11% then. Port turnaround times have fallen from 4-5 days
to less than 3 days. Manufacturers are more enthused by reliability than by costs.
Indian companies have improved quality and productivity

Over the last several years, Indian companies’ quality and productivity has improved substantially driven by increasing demand from both
export and domestic customers. A deluge of imports from China has also forced them to look inwards to stay competitive. Companies have
given a massive push to automation across the entire spectrum – with consequent fall in employees per capacity. By all accounts, quality
of products made by Indian vendors has improved as a result, though this is hard to quantify. Good quality companies have also benefited
from the pains of unorganized sector who have lost tax arbitrage post GST and many perished during the pandemic due to lack of balance
sheet strength.
Global environment is supportive

While several of the efficiency improvements have been happening for the last few years, the global environment has changed
substantially in the last 2-3 years. The Western world has been looking to broad base supply sources away from China and India has been
focused on import substitution. Global suppliers in India also seem to recognize the need to localize both production and capital goods
procurement, given the increasing salience of India in their growth plans. These got further exaggerated due to the fault lines that
appeared in the supply chains during the pandemic. Changes in China’s internal factors – demographics as well as policy changes that
prioritize production for local market at the expense of exports and goods that it considers strategically important at the expense of
current production pattern – also help shift production to India.
Ability to absorb capital but not labor

The improvement in growth prospects of manufacturing companies leads to increasing prospects of private sector capex cycle, as positive
sentiment gets further boosted by low cost of capital. Corporate credit growth, anaemic so far, is likely to pick up from CY22 as project
plans materialize. Employment generation, however, is likely to be mixed – low end job creation is likely to lag by 2-3 years as incremental
capex comes with lower labor needs. Government finances will continue to benefit from higher growth in tax paying organized sector.
Feedback from the ground

We did an extensive survey of companies, especially MSMEs in the engineering space, and the inescapable feedback is one of optimism
based on extremely strong growth visibility and capex plans. Companies have benefited from surging export orders across sectors, import
substitution in capital goods and general buoyancy in domestic demand. Every company is focused on increasing capacity significantly as
well as automation, resulting in lower labor intensity of growth. Wage inflation for unskilled workers is 7-10% while skilled workers are
hard to get. Companies also confirmed that procedural issues with GST have been largely addressed. Supply chain related issues are a
major concern. (Continued on page 2…)
Govindarajan Chellappa (MD – Head of Research) Kevyn Kadakia, CFA (AVP – Cap Goods) (Continued on page 2…)
govindarajan.c@axiscap.in; +91 22 4325 1107 Kevyn.kadakia@axiscap.in ; +91 22 4325 1123
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India strategy
Strategy Update
(…Continued from page 1)
Market implications
Indian markets have performed extraordinarily well from the March 2020 bottom, both on an
absolute basis as well as relative to other EMs. The valuations for the broader market have reached
19.5x on a 2-year forward basis. We do not see meaningful returns for the market overall from
these levels. In the currently fancied sectors, the market is pricing possibilities as certainties and
near-term certainties to infinity. The implied growth assumptions are too high and assumed cost of
capital too low. We see highest risks to stocks with high implied growth assumptions when risk free
rates start to move up. We recommend underweight consumer, consumer discretionary, and IT.
We would play the manufacturing revival theme through capital goods manufacturers, industrials
and financials – we recommend overweight these.
November 30, 2021 2

India strategy
Strategy Update
Table of contents
Is India’s manufacturing set for long growth? ................................................................................... 4
Infrastructure improvement helps drive down macro cost and improves reliability ......... 8
Global environment is supportive ...................................................................................................... 13
Ability to absorb capital but not labor .............................................................................................. 16
Feedback from the ground .................................................................................................................... 28
Market implications ................................................................................................................................. 32
November 30, 2021 3

India strategy
Strategy Update
Is India’s manufacturing set for long growth?

India was one of the few major economies to see acceleration in its manufacturing growth in five-
year period just prior to the pandemic, while the rest of the world slowed. Notably, India’s
manufacturing GVA grew faster than China’s in that period, after a long time. India also gained
share in global trade of manufactured goods, especially in machinery, steel and chemicals (ex-
pharma). These trends took a temporary halt during the lockdown but seem to have further
entrenched as the world emerges out of the pandemic. India’s manufactured goods exports grew
42% in CY21YTD, compared to global growth in trade of 27%. Trade deficit with China also
reduced by 80 bps over FY16-21. The signs are all there.
Exhibit 1: India’s share (% of world)
20% 18.4% 17.8%

18%
16%
14%
11.8%
12%
10%
8%
6%
4% 3.2% 3.1% 2.7%
1.6%
2%
0%
Working Popln. Agri GVA Manu GVA GDP Services Merch.
Age Popln. GVA trade
Source: World Bank, CEPII, WTO, Axis Capital
India has been steadily gaining share of global manufacturing value add for several years. However,
despite the share gains, it accounts for only 3.2% of the global manufacturing GVA, compared to
12% for agriculture and 2.7% for services.
Exhibit 2: India’s share of global manufacturing GVA (%)
India's share of global manufacturing GVA

3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
1970
1974
1976
1980
1982
1984
1986
1988
1990
1994
1996
2000
2002
2006
2008
2012
2014
2016
2018
1972
1978
1992
1998
2004
2010
Source: CEPII, Axis Capital
India’s share of global manufacturing GVA is tiny compared to that of China and the gap has
actually expanded in the last two decades.
November 30, 2021 4

India strategy
Strategy Update
Exhibit 3: India vs. China – share of global manufacturing GVA
India share of global manu. GVA China share of global manu. GVA
30%
25%
20%
15%
10%
5%
0%
2005
2007
2008
2010
2011
2012
2013
2015
2016
2017
2018
2006
2009
2014
2019
This is true of India’s share of global merchandise trade as well where India’s share has stagnated
since 2011.
Exhibit 4: India and China’s share of global trade
India's exports as % of global China's exports % of global
15%
12%
9%
6%
3%
0%
1982
1984
1988
1990
1992
1996
1998
2000
2004
2006
2008
2012
2014
2018
2020
1980
1986
1994
2002
2010
2016
Source: WTO, Axis Capital
The comparison comes out even more stark when looking at trade in manufactured goods.
Exhibit 5: India and China’s share of global trade within agri and manufactured goods
India China
20%
15%
10%
5%
0%
Agri Manufactured
November 30, 2021 5

India strategy
Strategy Update
The trends seem to have turned move favorable for India since the last few years as it not only grew
faster than global output but also faster than China’s in the five years just prior to the pandemic.
Exhibit 6: India vs. China growth in manufacturing GVA (% CAGR)
India China
14% 13.4%
12%
10% 9.5%
7.7%
8% 6.8% 7.1%
5.9%
6%
4%
05-10 10-15 15-19
Source: UNSTATS, Axis Capital
This trend is visible in trade data as well.
Exhibit 7: India vs. China growth in total merchandise exports (% CAGR)
India China
25.0%
25%
19.1% 18.6%
20% 17.8%
15.7%
15%
11.3% 10.9%
10% 7.6%
6.7%
4.9%
5% 3.4%
2.4%
0%
90-95 95-00 00-05 05-10 10-15 15-19
Exhibit 8: India vs. China growth in manufactured goods exports (% CAGR)
India China
30%
26.1%
25% 23.1%
20% 16.6% 16.1%

13.1% 14.3%
15% 12.0%
10% 7.2% 7.7%
5.6% 6.0%
5% 2.1%
0%
90-95 95-00 00-05 05-10 10-15 15-19
November 30, 2021 6

India strategy
Strategy Update
Exhibit 9: India vs. China growth within manufactured goods exports

(% CAGR, FY15-19)
India China
20%
14.4%
15% 12.4%
9.8%
10% 6.5% 5.7% 6.7%
6.2% 4.7% 3.9%
3.4% 2.4%
5% 1.4% 1.2%
0%
-0.1% -1.4%
-5% -3.6% -1.6% -3.4%
Pharma
Others
Clothing
Textile
Iron and steel
Chemicals (ex pharma)
Transport eq (ex auto)
Machinery
Auto prod
The pandemic put unequal pressure on various countries, with India suffering more than China.
Thus, there was a temporary disruption in the relative performance. However, recent months have
seen a strong resurgence in India’s manufacturing output relative to global output.
Exhibit 10: India total exports vs. global trade % CAGR (9MCY21 vs. 9MCY19)
8.6%
8.42%
8.4%
8.2%
8.0%
7.8%
7.6%
7.44%
7.4%
7.2%
India World
Our analysis and recent trends suggest India is set to gain major share of global manufacturing
output.
November 30, 2021 7

India strategy
Strategy Update
Infrastructure improvement helps drive down macro cost and

improves reliability
 Over the last 20 years, considerable investments have gone into improving the physical
infrastructure, resulting in significant changes in cost and reliability of major factors. Average
distance travelled by trucks has increased from 250-300 kms 5 years ago to 450-600 kms now,
both due to improving quality of roads as well as removal of checkposts post GST. Power
availability has improved substantially since the dark days of 2012/3 with peak deficit
averaging less than 1% compared to c11% then. Port turnaround times have fallen from
4-5 days to less than 3 days. Manufacturers are more enthused by reliability than by costs.
 India has traditionally suffered from poor physical infrastructure relative to its competition,
making production in India costly and unreliable. Several studies in the 2000s and early 2010s
suggested that India suffered anywhere between 500-1,500 bps cost disadvantage due to
poor road network, expensive power and slow clearance at ports. Worse, they made India an
unreliable source of manufacturing for global buyers as there was no predictability in supply
timelines. However, heavy infrastructure investments have significantly addressed several of
these disadvantages.
Inland transport
 Government studies as well as trade bodies estimate India’s logistics cost at c14% of GDP,
compared to global average of 8-10%. Transportation cost accounts for over 60% of the total
logistics cost. India has fairly spread out industrial clusters, with bidirectional movement of
raw materials, capital goods and finished products. Roads account for bulk of the inland
transportation (almost 70%), an anomaly considering the large lead distances.
 Since early 2000s, there has been an intense focus to improve the road network, especially
national highways which account for bulk of the cargo movement. The total length of
national highways has doubled in the last 10 years and the average number of lanes has also
increased significantly.
Exhibit 11: India national highway length (kms)

1,60,000
1,40,000
1,20,000
1,00,000
80,000
60,000
40,000
20,000
1991
1993
1997
1999
2001
2003
2009
2011
2013
2019
2021
1995
2005
2007
2015
2017
Source: MoRTH, Axis Capital
November 30, 2021 8

India strategy
Strategy Update
Exhibit 12: India national highways no. of lanes

3.4
3.2
3.0
2.8
2.6
2.4
2.2
2.0
2011 2021
Source: MoRTH, Axis Capital
Implementation of GST has also made a big difference to the efficiency of inter-state
transportation as it has resulted in lower delays at (state) border check posts. Prior to
implementation of GST, stoppage and slow movement at state borders accounted for 10-20% of
the total travel time depending on the number of borders to be crossed (also accounting for
efficiency of the border check posts). That has fallen to less than 5% with the implementation of
GST and relatively smooth movement with e-way bills. Implementation of Fastags for electronic
collection of tolls has also helped speed up traffic.
The average speed of a truck earlier was more determined by quality of roads and traffic and
efficiency at border check posts and lesser by the quality of the truck itself. But that has changed
as truck owners are now in a position to invest profitably in larger trucks with better power to
weight ratio.
Exhibit 13: India average size of trucks sold
Average size of trucks sold (tons)
25 24.1
24
22.6 22.8
23 22.3 22.2
22 21.7
21.2
21
19.8 19.9
20 19.2 19.3
19 18.7
18.2
18
17
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
Source: SIAM, Axis Capital
The net result of these changes – better roads, lower stoppages and better trucks on road – is a far
better average distance travelled per truck per day. Based on our conversations with various
companies, trucking and consignors, there has been a 20-50% increase in average distance covered
per day.
November 30, 2021 9

India strategy
Strategy Update
Exhibit 14: India: Average distance covered by trucks/day

550
500
450
400
350
300
250
200
2011 2016 Now
Source: Axis Capital
This has several implications for Indian manufacturers. Cost of transportation comes down
meaningfully on account of both time saved as well as lower goods in transit leading to lower
inventory costs. As an example, an engineering company making heavy machinery transporting a
full truck load on a 25 MT GVW truck (load of 16 MT) over 2,500 kms could save up to 18% on the
outbound logistics cost. Low value items save more on transportation costs (as % of value) and high
value goods save more on inventory holding costs (as % of value).
Exhibit 15: Efficiency led savings in logistics

At 2015 efficiency At current efficiency Difference
Value of goods transported (Rs.) 36,00,000 36,00,000
Total distance (kms) 2,500 2,500
Average distance per day (Kms) 300 450 50.0%
Time take (days) 8.3 5.6 -33.3%
Fuel efficiency (Kmpl) 3.1 3.5 12.9%
Variable cost per day (Rs.) 10,390 14,091 35.6%
Fixed cost per day (Rs.) 13,610 15,500 13.9%
Total transportation cost (Rs.) 2,00,000 1,64,397 -17.8%
Cost of holding inventory (Rs.) 9,863 6,575 -33.3%
Total logistics cost (Rs.) 2,09,863 1,70,972 -18.5%
Outbound Logistics cost (as % of value of goods) 5.8% 4.7%
Note: The actual costs haven’t fallen as much due to diesel price inflation. But from a
competitiveness angle, that is less relevant
In addition to cost savings, the ability of the supply chain to reliably plan its inbound and outbound
logistics owing to the improvement in predictability of movement of trucks has a far more
significant positive impact on operations.
Similar to roads, there has been a significant improvement in turnaround times at major ports
as well.
November 30, 2021 10

India strategy
Strategy Update
Exhibit 16: India major ports turnaround time (days)

9
8.1
8 7.7
7
6 5.3
5 4.6 4.6 4.3
4.2 4.0 4.2
3.8 3.9
4 3.5 3.5
2.9 2.7
3 2.6
2.1
2
FY91
FY96
FY01
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
H1FY21
Source: Ministry of shipping
The next big improvement, at least in parts of the country, would come as and when dedicated
freight corridor opens up for end to end traffic (it is only partially open). This is expected in
2023/24.
Exhibit 17: Change in train logistics post DFC

Comparison of current system and potential in DFC Current DFC
Train length (m) 685 1,500
Wagons per train 72 140
Loading per Wagon (MT) 60 100
Carrying capacity per train (MT) 4,320 14,000
Maximum speed (KM/Hr) 75 100
Average speed (KM/Hr) 25 80
Capacity per train per hour (Tonne-KMs) 1,08,000 11,20,000
Distance between stations c10-20 c40-60
Traction Electrified/diesel Electrified
Sequencing priority For Pax Linear
Timetable for freight trains No assurance Yes
Containers Single stack Double
Source: DFCCIL, Axis Capital
Reliability of power supply

Another area in which there has been a significant improvement is in cost and availability of power.
Exhibit 18: India peak power deficit (%)

0
(2)
(4)
(6)
(8)
(10)
(12)
(14)
(16)
(18)
(20)
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
H1FY22
Source: CEA, Axis Capital

India strategy
Strategy Update
Tax rates now competitive

The government has made a special window till 2023 for manufacturing companies to set up
factories in India with a concessional tax rate that makes it very competitive relative to all
other markets.
Exhibit 19: India: Tax rate for manufacturing cos competitive vs. other markets
25%
25% 24%
24%
23%
22%
21% 20% 20%
20%
19%
18% 17% 17%
17% 16%
16%
15%
Indonesia Malaysia Vietnam Thailand India Singapore China
Source: World Bank, Axis Capital
While India still lags behind on many infrastructure parameters, the difference in cost and quality
has narrowed significantly, making the country a better place to invest in than what it used to be a
few years ago.

India strategy
Strategy Update
Global environment is supportive

While several of the efficiency improvements have been happening for the last few years, the
global environment has changed substantially in the last 2-3 years. The Western world has been
looking to broad base supply sources away from China and India has been focused on import
substitution. Global suppliers in India also seem to recognize the need to localize both production
and capital goods procurement, given the increasing salience of India in their growth plans. These
got further exaggerated due to the fault lines that appeared in the supply chains during the
pandemic. Changes in China’s internal factors – demographics as well as policy changes that
prioritize production for local market at the expense of exports and goods that it considers
strategically important at the expense of current production pattern – also help shift production
to India.
Several of the improvements cited in micro and macro factors have been happening for a while but
it is only in the last 2-3 years that India has got a seat on the table. Rising geopolitical tensions
between the Western world and China has been one major factor in the last 5 years. The Western
world’s dependence on China is quite high across the value chain and there is growing sense of
insecurity around this dependence.
Exhibit 20: China’s share across key sectors in global trade (%)
50% 47.0%
40.0% 39.2%
40% 31.5%
30%
20.0% 20.5%
20%
10%
0%
Ics & electronic
Clothing
Electronics
Textiles
Manufactured
Telecom equipment
components
goods
Over the last few years, there has been an increasing unease with China’s trade practices. Several
countries have initiated action against imports from China – 26% of all anti-dumping measures
active globally are against China (30% of EU’s and US’s are against China).
Exhibit 21: Anti-dumping duty measures initiated against China
Anti-dumping measures against China as % of world (RHS)
65 50%
60 45%
55 40%
50 35%
45
30%
40
35 25%
30 20%
25 15%
20 10%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2014
2015
2016
2017
2018
2019
2020
1999
2000
2001
2011
2012
2013

India strategy
Strategy Update
What started as apolitical and a social issue got translated to a commercial one during the
pandemic as the collapse in global logistics left many manufacturers with shortage of key
components and machinery. There is therefore a rush to move back production to the home
country and to broad base supply sources. Several American and European owned plants in India
were also left stranded without critical components and that is forcing these manufactures to
localize at least to the extent of domestic demand.
There is also a movement within the Indian corporate and political circles to reduce sourcing from
China. Like rest of the world, India is dependent on China in several sectors but that dependence
has been slowly reducing since the last 5 years.
Exhibit 22: China’s share of India imports
China's share of India imports (%)
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
Source: CMIE, Axis Capital
Exhibit 23: India’s trade deficit with China and % of GDP
India's trade deficit with China (US$bn)

India's trade deficit with China (% of GDP, RHS)
70,000 3.0%
60,000 2.5%
50,000
2.0%
40,000
1.5%
30,000
1.0%
20,000
10,000 0.5%
0 0.0%
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
Political considerations aside, there has always been a strong economic rationale for global
companies to look at India as an alternate source. The large and growing size of the domestic
market has anyway ensured that most global companies have large presence or ambitions in India
one way or another. In addition, China is going through a rapid demographic transition, with
expected fall in working age population while India’s working age population is forecast to rise for
the next several years.

India strategy
Strategy Update
Exhibit 24: India and China working age population as % of world
India working age popl (% of world) China working age popl (% of world)
24%
22%
20%
18%
16%
14%
1963
1966
1972
1975
1981
1984
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
2023
2026
2029
2032
2035
2038
1960
1969
1978
1987
Source: United Nations, Axis Capital
Consequently, China’s wage rates started to move up meaningfully in the last few years, making it
less competitive than earlier.
Exhibit 25: India: Manufacturing labor cost comparison vs. other countries
Manufacturing labor cost
60 (USD/ hr)
49
50 44
40
28 27
30
20
10 7
2
0
US Germany Singapore Japan China India
Source: EIU, Invest India Kearney, Axis Capital
There are also China’s political and social factors at play. China seems to encouraging a shift away
from polluting industries. Now this observation needs to be seen together with India’s own
tightening environmental policies. Feedback from Indian companies suggest that Chinese
companies got a free pass when it came to issues of pollution and that unnatural advantage is now
disappearing. It is not as if India is diluting its own environmental norms – it is still very hard to get
permissions to set up polluting industries and there is additional resistance from local population
whenever and wherever such plants come up.
While one could debate the pace of change, the direction of change is unmistakable. India is set to
gain from China in the global manufacturing value chain. And given the relative sizes, small gain
from China could result in meaningful growth for India.

India strategy
Strategy Update
Ability to absorb capital but not labor

The improvement in growth prospects of manufacturing companies leads to increasing prospects
of private sector capex cycle, as positive sentiment gets further boosted by low cost of capital.
Corporate credit growth, anaemic so far, is likely to pick up from CY22 as project plans materialize.
Employment generation, however, is likely to be mixed – low end job creation is likely to lag by
2-3 years as incremental capex comes with lower labor needs. Government finances will continue
to benefit from higher growth in tax paying organized sector.
India’s capex cycle has gone through a long period of correction.
The pattern of economic growth went through a big change in the last few years, as investments
slowed considerably while private consumption and government consumption remained
relatively stable.
Exhibit 26: India growth in real GDP and components (% CAGR)
FY04-12 FY12-21
12% 11.4%
10%
7.9%
8% 7.0%
6.0%
5.6%
6% 4.9% 5.0%
3.9%
4%
2%
Private Cons Govt. cons GFCF GDP
We think that the long drought in manufacturing capex is about to end. There are several industries
that are likely to benefit from the changed global scenario, and this will likely trigger a positive
economic cycle in India. Indian corporate sector is in a financial position to expand and banking
sector in a position to lend. Consequently, we see a major uptick in private sector capex cycle.
The Western world is looking to reduce dependence on China and diversify its supply base. This is
benefiting Indian companies in several ways.
Firstly, American and European owned global suppliers of capital equipment to Indian customers
are now localizing. We are seeing this in the case of textile machinery, escalators, elevators,
material handling equipment, blast furnaces, steel rolling machines etc.
Secondly, Western companies (and even Chinese companies in some cases) are increasing sourcing
of components for global operations from India – we are seeing this in auto components, castings,
forgings, gear boxes, apparels etc. these are industries where India already has a large presence
both in domestic and global markets and has a well-developed supply chain with several
large companies.
Thirdly, Indian capital goods manufacturers are benefiting from the resulting expansion in capacity
by foreign and Indian manufactures of goods in India.
Lastly and most encouragingly, Indian capital goods makers are seeing increasing demand from
both American and European companies which are expanding capacities in home markets as the
customers want to rely less on China for capital goods too. Indian capital goods makers seem to be
invited to the table for negotiations for the first time ever.

India strategy
Strategy Update
Feedback from the ground suggests increasing demand due to direct and indirect import
substitution and export opportunities for the following industries:
 Auto components
 Machine tools
 Specialty Chemicals
 Healthcare equipment
 Gearbox for windmills
 Steel making equipment and its components
 Plastic mounding machines
 Castings
 Forgings
 Dies and moulds for autos (including EVs) and industrial applications
 High speed elevators and escalators
India Infra Capex Outlook

India spent ~Rs 57 tn on Infrastructure over FY13-19, ~5.7% of nominal GDP. The National
Infrastructure Pipeline (NIP) laid down a target to spend ~Rs 111 tn (~US$ 1.5 tn) on infra over
FY20-25, keeping in sight the vision of a US$ 5 tn economy by 2025. The unveiling of the NIP
overlapped with the commencement of the pandemic, and dragged down nominal GDP in FY21 to
-3%. Assuming India achieves 9.5% nominal GDP growth in FY22 and 10.5% thereafter through
FY25, a 6.0% infra spend to GDP would imply ~Rs 85 tn capex, ~24% below NIP target. Even this
outcome implies a healthy 10% CAGR of infra spend on FY19 base.
Exhibit 27: Infra capex actuals and NIP estimates (Rs tn)
25
21.5 21.3
20
16.5
15.4
14.4
15 13.2
10.2 10.0
8.5 9.2
10
6.3 7.0
5.3
5
0
FY18E
FY19E
FY20E
FY21E
FY22E
FY23E
FY24E
FY25E
FY13
FY14
FY15
FY16
FY17
Source: NIP, Axis Capital

India strategy
Strategy Update
Exhibit 28: Infra capex actuals and Axis estimates (Rs tn)
Axis est. (based on infra spend @ 6% of nom GDP)
20 17.5
15.8
14.3
15
12.2 11.8 13.0
10.2 10.0
8.5 9.2
10
6.3 7.0
5.3
5
0
FY18E
FY19E
FY20E
FY21E
FY22E
FY23E
FY24E
FY25E
FY13
FY14
FY15
FY16
FY17
Source: NIP, Axis Capital, Nominal growth at 10.3% CAGR (FY21-25E)
Slippages vs. government target have been a norm in the past. The erstwhile Planning Commission
target of Infra spend over FY13-17 was Rs 56 tn (US$ 1 tn then). Actual infra spend over this period
was ~Rs 36 tn, implying a slippage of 35% versus target, broad-based across sectors and the miss
was led by private sector. The share of private sector in infra spending has been coming off from
37% over FY08-12 and is pegged at ~21% over FY20-25 in the NIP.
Exhibit 29: India Infra Spend Mix – govt has ~80% share over FY20-25E
Centre State Private
100%
22 26 21
37 31
80%
60% 36 39
29 44
44
40%
20% 42 40
34 30
25
0%
FY03-07 FY08-12 FY13-17 FY18-19E FY20-25E
Source: NIP, Axis Capital, Planning commission, FY18-19 Centre and state are actuals, while private is based on NIP estimate

India strategy
Strategy Update
Exhibit 30: Sector-wise actual spends vs. projected over FY13-17 (total 65% achieved
vs. target)
FY13-17 actuals (Rs trn) % achieved vs. target (RHS)
15 127% 150%
12 120%
9 72% 71% 90%

60% 56% 52%
6 45% 60%
25%
3 5% 30%
4.8 13.2 6.5 3 2.9 4.9 0.4 0.5
0 0.1 0%
Airports
Irrigation
Others
Roads
Telecom
Railways
Ports
Urban
Power
Source: NIP, Axis Capital, Planning commission; Others include rural infra (including water and sanitation), social infra (mainly
higher education and health and family welfare), industrial infra (mainly industries and internal trade) and agri and food
processing infra
Power, road, urban infra and railways are expected to account for ~71% of infrastructure capex
over FY20-25. Renewables, urban metro rail, drinking water are pockets of high growth. A revival
in private developer appetite for PPP, higher-than-expected investments into Sagar Mala, a river-
interlinking program, new dedicated freight corridors, smart city development, industrial corridors
and nuclear generation could afford positive surprises to our base case. On NIP launch ~40% of the
projects were under implementation; given average execution cycle of infra projects is in the ball-
park of 3 years, there should be a flurry of project award activity in the next one year, to come close
to the FY20-25 infra capex target.
Then there are industries that supply material to these sectors cited above, including steel which
is likely to be one sector leading a big uptick in investments. Steel industry has seen a big uptick in
profitability and a sharp fall in leverage.
Exhibit 31: India steel cos capacity utilization and operating profit/ton
Capacity utilisation (%) EBITDA/Ton (Rs., RHS)

95% 30,000
90% 25,000
20,000
85%
15,000
80%
10,000
75% 5,000
70% 0
FY22E
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
Source: Ministry of Steel, Axis Capital

India strategy
Strategy Update
Exhibit 32: India steel capacity and bank lending to steel sector
Steel capacity (MMT) Bank lending to steel sector (Rs bn)
150 3,300
140 3,100
130 2,900
120 2,700
110 2,500
100 2,300
90 2,100
80 1,900
70 1,700
60 1,500
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 Now
Source: Ministry of Steel, RBI, Axis Capital
Indian manufacturing companies have cut costs and leverage

The process of cost cutting and deleveraging that started with the slowdown in economy
accelerated post NBFC crisis and further enhanced during the pandemic. The increasing employee
productivity from FY16-20 is symptomatic of this – needless to say, the pandemic-induced sales
drop in FY21 reduced the productivity temporarily but Indian companies tightened belts further
during this period.
Exhibit 33: India: Employee productivity across manufacturing companies
Rev per employee (Rs mn)
18
16
14
12
10
8
6
4
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
1HFY22
Source: Capitaline, Axis Capital; 745 companies across manufacturing related sectors

India strategy
Strategy Update
Exhibit 34: India: Employee cost (% of sales) for manufacturing companies
Emp cost % of sales
11.0%
10.5%
10.0%
9.5%
9.0%
8.5%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
1HFY22
The sector’s net profit margin has also been improving since FY16 and is close to 12-year highs.
Exhibit 35: India: Net profit margin for manufacturing companies
Net profit margin (%)
13.5%
12.5%
11.5%
10.5%
9.5%
8.5%
7.5%
6.5%
5.5%
4.5%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
1HFY22
Companies have used the resultant cash flows to deleverage the balance sheet.
Exhibit 36: India: Net debt to equity for manufacturing companies
Net Debt/Equity
0.75
0.65
0.55
0.45
0.35
0.25
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
1HFY22

India strategy
Strategy Update
Exhibit 37: India: Net debt to EBITDA for manufacturing companies
Net Debt/EBITDA
2.5
2.0
1.5
1.0
0.5
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
1HFY22
Exhibit 38: India: Interest (% of sales) for manufacturing companies
Int cost (% of sales)
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
1HFY22
Where will the jobs come from?

India faces an employment crisis that doesn’t seem likely to abate despite a strong forecast capital
expenditure cycle. The employment situation has been a matter of much debate with little or no
reliable data. The only matter on which there seems to be some sense of consensus is that
unemployment rates are high and uneven across income classes. Even as IT companies struggle to
contain churn and runaway wage inflation, demand for NREGA from rural poor is at a record high.
The hopes placed on manufacturing to provide jobs have been misplaced, at least so far.
Manufacturing sector isn’t adding to as many job opportunities as growth in investment in the
sector would indicate. Labor intensity has fallen across labor-intensive and capital-intensive
industries.

India strategy
Strategy Update
Exhibit 39: India: Employee cost to capital employed for manufacturing companies
Employee cost/Capital employed
14%
13%
12%
11%
10%
9%
8%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
1HFY22
The reason for continuous fall in labor intensity of economic activity has been continuous drive
towards mechanization and automation across all economic activities. There isn’t one
industry/activity that we are aware of where this isn’t the case. The managements of companies
prefer to increase automation in a country labor is supposedly cheap and abundant. There are
several reasons for this:
 Indian companies had too much labor to start with.
 Significant skill mismatch. Even now, when supposedly unemployment is high, most companies
complain about unavailability of people with the right skills
 Mismatch between job quality and compensation. Engineers prefer to work in IT companies
and semi-skilled labor prefer to work in retail outlets and logistics rather than work in
a factory
 Low productivity and reliability of unskilled labor
 Massive improvement in technology in Western world as they struggle with falling working
age population. Some of that has been imported into India
 Falling cost of automation, set to fall further with localization
 Regional mismatch in demand and supply of labor. Net demand for labor comes from South
and West, net supply comes from North and East
 Difficulty in managing seasonality in unskilled labor availability (esp. festivals)
 In most of our conversations, labor laws or union related issues hardly find a mention.
Agriculture is the largest employer in India. The extent of underemployment and hidden
unemployment is significant in this sector but at least it has the potential to absorb excess labor for
part of the year. While there has been mechanization in agriculture as well, it has been constrained
by fragmentation in land holding, making it difficult for most land owners to mechanize.
Construction is supposedly the second largest employer in the country. We suspect this is the
space where automation has increased the most in recent years, as evidenced by some
examples below.
Road construction
The first wave of mechanization in this sector started in early 2000s when India started its
ambitious national highway program. Funded by multi-lateral agencies, these projects introduced
new codes and practices for the first time. These codes were adopted in the construction of state
highways and district roads too. The main change was in sourcing of non-bituminous base,
movement of aggregates and compacting. It is estimated that the labor content per lane kilometer
reduced by nearly 50% compared to the prior practices. In the last 10 years, there has been a
further fall of 10-20% in labor content as there has been an increasing use of compactors,
excavators, tar laying machines and the likes. Several EPC companies we spoke to believe that the
labor intensity would keep falling as there is further scope to mechanize several activities
even now.

India strategy
Strategy Update
Track laying machines

Track laying machines (imported), currently being used in the construction of dedicated freight
corridor is one of the most stunning examples of labor replacing machines. A machine can lay about
1.5 kms per day with about 20-25 people on the job. The traditional manual way of laying these
tracks would have required 1,500-man days to lay 2.5 kms of tracks. These track laying machines
are expensive and can be used only in large contiguous projects like the DFC. But suffice it to say
that the DFCC project hasn’t really created as many jobs. While this is an extreme example, the
railways has also slowly modernized its processes and cut down on contract labor (Indian railways
is the largest employer of contract labor in the country).
Real estate
Real estate and building construction has seen a gradual shift in technology from conventional
formwork to aluform (suitable for construction activity with multiple repetitions) and deck form.
The man power requirement for the newer technologies is much lower (c30%) and cycle times are
30-40% quicker. The net result is effective fall of c50% in man hours required per slab.
This continues to play out in the real estate sector and will result in further decline in per unit
labor content.
The next level of mechanization will likely be in adoption of power tools. A large part of binding of
reinforcements and nailing/de-nailing is done manually and that’s likely to change over the next
few years. There is still a lot of manual movement of material in construction sites but they are
quickly being replaced by machines that can now handle both horizontal and vertical movement of
materials. Based on our conversations, we think that labor intensity could halve even from here
over the next 5 years, especially as the sector gets more organized.
Exhibit 40: Fall in labor intensity of construction

0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%
-40%
-45%
-50%
Roads (per lane km) Railways track laying (per Real estate (per slab)
track km)
Manufacturing
Almost every manufacturing company in the listed space has seen a sharp fall in number of people
employed. The general trend is towards of automation wherever possible, with increasing
employment of skill labor but a higher absolute fall in semi-skilled/unskilled labor. In fact, one of
the main drivers of capex cycle is likely to be higher automation in manufacturing as they prepare
to compete in global markets which requires higher quality and reliability. Additionally, the
formalization of manufacturing which started with GST and accelerated during the pandemic is
further likely to reduce labor intensity as production in organized firms generally tend to be more
capital intensive than unorganized.

India strategy
Strategy Update
Exhibit 41: Larger firms tend to use less labor

0.18
0.16
0.14
0.12
0.10
0.08
0.06
0.04
0.02
0.00
0 10,000 20,000 30,000 40,000 50,000
Source: RBI, Axis Capital; Employee count (y-axis), Capital employed (x-axis)
The one hope for employment generation is this – earlier the machinery used for automation was
imported but that seems to be increasingly localized. However, the production of machines is less
labor intensive than the activities the machines are replacing. Therefore, there has to be a
reasonable period of strong growth before the lower per unit labor content is offset by higher
number of units. On the balance, the next few years will see continued pressure on job creation and
employment opportunities for the millions of youth joining the work force. Emerging service sector
opportunities (logistics, shared mobility, e-commerce) can only absorb part of the excess supply.
Credit growth will likely pick up from CY22

Credit growth slowed significantly in the last decade, along with the rest of the economy and not
surprisingly, industrial credit growth slowed the most, as capex cycle went through a downturn.
Exhibit 42: Slowdown in credit to most sectors (% CAGR)
2001-11 2011-21
30%
25%
20%
15%
10%
5%
Total Agriculture Industry Personal Trade
Source: RBI, Axis Capital
During the pandemic, several companies, especially in global commodity sectors, have deleveraged
balance sheets using up strong cash flows from operations to repay debt.

India strategy
Strategy Update
Exhibit 43: Sector credit relative to pre-Covid

0
(5)
(10)
(15)
(20)
(25)
(%)
(30)
Large corporates Steel Cement Engineering
We think this is temporary and will reverse once the new capacity expansion plans are put into
action. Thus far, companies have been unsure of the impact of Covid and possibility of third wave
and its impact on operations and been risk averse. However, that has changed in the last few
months, basis the strong order bookings and profitability during this period.
Similarly, the risk aversion among banks is also coming down, though not uniformly so. Some
leading private sector banks have become very aggressive in lending, especially to MSMEs but
others have been very cautious till recently. All banks, however, are unwilling to take large
exposure to single clients, except to a few large well reputed industrial houses. However, unlike the
previous cycle, the current pick-up in private investments is likely to be driven by large number of
small projects than small number of large projects. The resultant granularity in assets will help
mitigate risk perception, in our view.
Banks are also likely to take comfort from fall in their own non-performing assets, healthier
corporate balance sheets and generally higher capital adequacy post the recent equity issuances.
Exhibit 44: Fall in net non-performing assets (NNPAs) of scheduled commercial banks
(SCBs)
NNPAs (%)
9
8
7
6
5
4
3
2
1
0
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21

India strategy
Strategy Update
Exhibit 45: Adequate provisions made by SCBs
PCR (%)
70
65
60
55
50
45
40
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
Source: RBI, Axis Capital, Provision Coverage Ratio (PCR)
We think credit growth, especially to industry, will accelerate from CY22 as companies start
implementing capacity expansion plans.

India strategy
Strategy Update
Feedback from the ground

We did an extensive survey of companies, especially MSMEs in the engineering space, and the
inescapable feedback is one of optimism based on extremely strong growth visibility and capex
plans. Companies have benefited from surging export orders across sectors, import substitution in
capital goods and general buoyancy in domestic demand. Every company is focused on increasing
capacity significantly as well as automation, resulting in lower labor intensity of growth. Wage
inflation for unskilled workers is 7-10% while skilled workers are hard to get. Companies also
confirmed that procedural issues with GST have been largely addressed. Supply chain related
issues are a major concern.
Small-sized chemical company:

 Supply chain disruptions resulting in higher raw material prices as well as big delays
 Base chemicals imported from China as easier to get environmental clearance there. India’s
policies are much stricter and there is also local activism against new plants that seems to be
absent in China. But that could be changing
 Environment compliance is getting easier as guidelines are very clear (but not diluted) now;
earlier it was vague
 Focused on automation of processes over last few years; reduced headcount by 15% in last 2
years (permanent change)
 Doubling capacity over next 2 years and could have 4x current capacity in 4-5 years. See huge
opportunities as several products going off-patent in next few years
 Incremental capacity would be more automated; safety is the primary driver
 Working capital needs have gone up due to supply chain issues
 GST procedural issues – minor glitches still there but most issues largely resolved
Organic food manufacturer:

 E-commerce sales growing at the expense of modern trade; no change in general trade
 Demand spurted during pandemic as there was more focus on health but now has reversed
 Inflation has hurt demand as prices of organic foods much higher
Small FMCG company:

 Demand back to pre-Covid levels
 Unorganized competition has diminished as they were unable to invest in sales and
promotion during the pandemic; organized players used lower media prices to
increase visibility
 GST has made compliance easier and more reliable. Some procedural issues yet to be sorted
Warehouse leasing company:

 Demand growth is very strong
 GST has vastly simplified logistics and made it more efficient as crossing state borders isn’t
an artificial cost the way it used to be
 Time taken to get all permissions to set up a warehouse has come down from 2 years to 2
months
 Labor costs have increased c20% in last one year
 Massive investments by clients in racking and automation
 Land prices in some cities like Hyderabad are no longer affordable for new warehouses

India strategy
Strategy Update
Component supplier to pump makers:

 Big rise in exports in last 3 years (4-5x increase in absolute value of exports); demand
continues to be strong. Might consider expansion for this
 Backward integrated to localize raw material production; now effective raw material costs
c20% cheaper than what it would have been had it continued to be imported
 C25-30% of pump market is unorganized; several of them suffered during Covid
 Labor intensity constantly coming down due to automation
 Wage inflation about 7-8% right now
Small capital goods company:

 Supplies plastic molding machines
 Recovery from 2nd wave was extremely swift
 Market being driven by three factors – strong demand in domestic end market, market share
gains for domestic customers at expense of imports, and import substitution in own products
 Demand very strong across all segments – from makers of small plastics (import restrictions),
toy makers (imports from China no longer viable) to large electric project investments
 Plan to double capacity in 3 years
 Import content in production has already halved in recent past and will continue to reduce
 Facing challenges in imports – delays and extended working capital requirement as suppliers
asking for advances (used to get credit earlier)
 Shipment from China/Taiwan takes 60+ days now against c20 days earlier; effective freight
cost is up 7x
Mid-sized auto component supplier:

 GST has made a huge difference to the business; cost and time of inter-state transportation
has gone down meaningfully
 Long distance travel times for trucks down 40-50% and is far more predictable; big savings in
both transportation cost as well as inventory holding costs
 Shifted purchase of critical high value machines to local suppliers – 30% cheaper and quality
and efficiency is as good
 Automation is a big driver for investments; labor intensity down by 30-40% in last 4 years and
trend will continue
 Sees huge opportunities in import substitution in certain industrial components
 Closure of inefficient units during Covid
Mid-sized capital goods manufacturer:

 Demand was very strong over FY17-19 and then slowed even before Covid. But demand has
come back roaring in the last few months and is past previous peak
 Demand outlook strong across all customer segments, more so in domestic market
 India as a supply source becoming more reliable – ability to deliver at planned cost and
committed time has improved
 GST transition issues largely sorted; compliance is far simpler than pre-GST
 Quality demanded by Indian customers has gone up and almost matches with what global
customers want; this has helped Indian suppliers up their quality standards

India strategy
Strategy Update
Mid-sized component supplier:

 Exports have increased meaningfully in the last 2 years and will continue to increase; absolute
export revenues up 2x in FY22
 Export customers are replacing Chinese imports with imports from India; this includes
Chinese OEs
 Landed cost of Chinese products used to be 30% cheaper 5 years ago; now at a premium but
Indian quality is much better
 Container availability an issue; takes 45 days to get one; will have to pay 6x rate to get in
10 days
 Labor productivity up 30-40% in new plants vs old; so labor intensity coming down
 New plant is highly automated compared to the old one
 Logistics cost has not gone up despite sharp increase in diesel price; higher fuel cost offset by
efficiency gains due to lower travel times
 Still imports lot of machinery due to lack of domestic suppliers
Mid-size capital goods supplier:

 Largest player in its segment with over 30% market share; over half of demand from auto and
auto component makers
 Imports are c30% of markets but largely in high-value, low volume products
 Restarting capex that was pushed back during pandemic; capacity addition from hereon
largely dependent on investment by vendors; all of them expanding
 GST switchover was very easy for anyone running good IT systems; faced no issues. Saw big
reduction in receivables from government (input credit refunds) which has been rerouted for
capacity expansion
 Lots of auto component customers seeing high demand as global companies are shifting
sourcing to India from China. Also, see a similar trend in suppliers to healthcare
Mid-size capital goods supplier:

 Usually in a downturn, capital goods industry is hurt first and recovers last. This time, it was
among the first to recover – this is true of all sub segments of capital goods
 Component sourcing shifting from China back to home market and partially to India. Demand
is therefore strong both in India as well as in EU/US. This trend will accelerate
 India’s reputation for quality and reliability has improved significantly in the last few years.
For the first time, able to compete with European companies in Europe
 India still faces challenges in scaling up as companies are small and there is no government
support in this respect (unlike in China)
 In the domestic market, has been able to completely substitute European imports in certain
product segment at 25% cheaper price and better automation. This includes Indian
operations of European customers and opens doors for business in Europe
 Has good order visibility for next few years; fully booked for next 6 months
 Transportation time down 40% for 2,000 km travel
 Labor intensity falling continuously and will continue to do so.
 Automation is one key requirement for customers too and thus is a key selling point for any
capital goods company
 Availability of quality skilled manpower is a challenge

India strategy
Strategy Update
Steel industry consultant

 Huge expansion plans by almost all steel majors
 Plant technology for large mills is mostly with European and Japanese companies
 European companies shifting part of their sourcing from China to India, so to that extent
import content of capex will come down
 Current import content in plant and machinery is c50% (down from 80% 15 years ago) but
this will likely come down for the new plants as Europeans vendors localize
 Newer plants will be more automated with significantly lower labor content

India strategy
Strategy Update
Market implications
Indian markets have performed extraordinarily well from the March 2020 bottom, both on an
absolute basis as well as relative to other EMs. The valuations for the broader market have reached
19.5x on a 2-year forward basis. We do not see meaningful returns for the market overall from
these levels. In the currently fancied sectors, the market is pricing possibilities as certainties and
near-term certainties to infinity. The implied growth assumptions are too high and assumed cost of
capital too low. We see highest risks to stocks with high implied growth assumptions when risk free
rates start to move up. We recommend underweight consumer, consumer discretionary, and IT.
We would play the manufacturing revival theme through capital goods manufacturers, industrials
and financials – we recommend overweight these.
Our market view is premised on increased investment activity, strong export growth, higher
nominal GDP growth and higher credit growth but slow employment generation, continued stress
among the relatively poor households and their ability to consume and thus slow growth in
consumption, especially low-end consumption.
Indian markets have rebounded strongly from the March 2020 lows and reached a near all-time
high valuation of 23x 1-year forward consensus and 19.5x 2-year forward consensus estimates.
Exhibit 46: Nifty 1Y and 2Y forward P/E valuations
1 Yr Fwd - PE (x) 2 Yr Fwd - PE (x)

30
25
20
15
10
Nov-16
Nov-17
Nov-18
Nov-19
Nov-20
Nov-21
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Jul-17
Jul-18
Jul-19
Jul-20
Jul-21
Source: Bloomberg, Axis Capital
Reflecting the changes in the drivers of the economy, consumer facing stocks have outperformed
the Nifty in the last 10 years (ending Nov 2021) and investment cycle related stocks
have underperformed.

India strategy
Strategy Update
Exhibit 47: Nifty and sector returns (% CAGR)
Nifty Consumer staples Consumer durables Capital goods Metals
35 31.8
30
25.3 24.6
25 21.9
20 16.2 15.5
13.6
15 11.0 10.8
10 6.3
5
0
2001-2011 2011-current
Source: Bloomberg, Axis Capital
While we share the market’s optimism on the overall economic recovery and subsequent earnings
upgrade, we find the current skew towards consumer facing stocks unreasonable. The pack of high-
quality stocks, as defined by perceived earnings predictability and stability, benefited from lack of
alternatives as the investment cycle went into a downturn. Money moved out of domestic cyclicals
into consumer businesses and businesses with similar characteristics.
The consumer facing stocks have also benefited from a sharp fall in risk free rates and their risk
premia have also shrunk. The implied growth rates in many of these stocks are unrealistically high.
Stocks with high implied growth rates but relatively lower ROCEs suffer the most when risk free
rates move up.
Exhibit 48: P/E de-rating: Increase in cost of equity impacts high growth cos more
than low growth cos
5% 15% 20% 25%
250
200
150
100
50
0
7% 8% 9% 10% 11% 12%
Source: Axis Capital; X-axis is policy rates (%), Y-axis is P/E (x) multiple, The lines indicate cos in respective growth buckets

India strategy
Strategy Update
Exhibit 49: P/E de-rating: Increase in cost of equity impacts low RoCE cos more than
high RoCE cos
15% 25% 50% 75%
120
100
80
60
40
20
0
7% 8% 9% 10% 11% 12%
Source: Axis Capital; X-axis is policy rates (%), Y-axis is P/E (x) multiple, The lines indicate cos in respective RoCE buckets
While we are generally concerned about the valuations of the entire consumer space, staples
companies with high RoCEs and highly predictable (and therefore lower risk premia) but relatively
lower implied growth rates would be better placed in a rising rate scenario than consumer
discretionary companies that have unrealistically high implied growth rates (and unpredictable)
and much lower RoCEs. After the sharp rally, we find valuation of large cap IT stocks rich and would
be underweight this too.
While metals and mining sector is set to gain from the strength in global commodities, we believe
the cash flows from operations would be neutralized by heavy upcoming investments and would
recommend a neutral weight.
We believe incremental earnings upgrades would be most visible in industrials, capital goods and
commercial banks (especially corporate facing banks, including public sector banks). These sectors
trade at sensible valuations relative to history and these would be our key overweight.
Exhibit 50: Sector allocation

Overweight Neutral Underweight
Industrials Metal Consumer staples
Capital goods Power Consumer discretionary
Financials Pharma Information technology
Commercial vehicles

India strategy
Strategy Update
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India strategy
Strategy Update
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Ratings Expected absolute returns over 12 months
BUY More than 15%
ADD Between 5% to 15%
REDUCE Between 5% to -10 %
SELL More than -10%
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Axis Manufacturing Capex - Nov21

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India strategy

November 30, 2021 Strategy Update

Is India’s manufacturing set for long growth?

Indian companies have improved quality and productivity

Global environment is supportive

Ability to absorb capital but not labor

Feedback from the ground

(…Continued from page 1)

November 30, 2021 2

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Is India’s manufacturing set for long growth? ................................................................................... 4

Global environment is supportive ...................................................................................................... 13

Ability to absorb capital but not labor .............................................................................................. 16

Feedback from the ground .................................................................................................................... 28

Market implications ................................................................................................................................. 32

November 30, 2021 3

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Is India’s manufacturing set for long growth?

Exhibit 1: India’s share (% of world)

20% 18.4% 17.8%

Exhibit 2: India’s share of global manufacturing GVA (%)

India's share of global manufacturing GVA

Source: CEPII, Axis Capital

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Exhibit 3: India vs. China – share of global manufacturing GVA

Exhibit 4: India and China’s share of global trade

India's exports as % of global China's exports % of global

Source: WTO, Axis Capital

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Exhibit 6: India vs. China growth in manufacturing GVA (% CAGR)

This trend is visible in trade data as well.

Exhibit 7: India vs. China growth in total merchandise exports (% CAGR)

Exhibit 8: India vs. China growth in manufactured goods exports (% CAGR)

20% 16.6% 16.1%

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Exhibit 9: India vs. China growth within manufactured goods exports

Chemicals (ex pharma)

Transport eq (ex auto)

Source: WTO, Axis Capital

Source: WTO, Axis Capital

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Infrastructure improvement helps drive down macro cost and

Exhibit 11: India national highway length (kms)

Source: MoRTH, Axis Capital

November 30, 2021 8

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Exhibit 12: India national highways no. of lanes

Source: MoRTH, Axis Capital

Exhibit 13: India average size of trucks sold

Average size of trucks sold (tons)

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Exhibit 14: India: Average distance covered by trucks/day

Source: Axis Capital

Exhibit 15: Efficiency led savings in logistics

November 30, 2021 10

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Exhibit 16: India major ports turnaround time (days)

Exhibit 17: Change in train logistics post DFC