Will the Make-in-India push get a fillip from Union Budget 2024?
The Budget will have to address demand-side challenges while making provisions to simplify regulations.
Highlights
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- Private capex will require an enabling policy push
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- Manufacturing FDI stood at 5-year low in FY24
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- Special attention to job creation and new-age sectors
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- Valuations remain key concern for the sectors getting policy support
- Stay selective in Defence, EMS, and Green Energy
Private capex remains an important driver of growth and job creation in the economy. The government has led capital expenditure in the last 2-3 years, but investment in private sector continues to be sluggish. Despite the various policy measures (tax reduction, PLI schemes etc.), the FDI equity inflows in India declined to $44.4 billion in FY24 from $46 billion in FY23.
Therefore, Budget 2024-25 has a task of not only addressing the demand-side challenges but will also have to focus on simplifying the regulatory framework to enhance the ease of doing business.
While enhancing manufacturing competitiveness and reducing import dependency will continue to drive the next leg of growth, the government may also promote capital investment in labour-intensive sectors such as agriculture, textiles, leather, footwear, healthcare, and hospitality to address the large-scale problem of unemployment and job creation.
That said, the following are our expectations for a few key sectors in the upcoming budget.
Defence: Deploy capital gradually at lower valuations.
Defence is catching a lot of attention with strong policy initiatives. Recently, the government issued the fifth positive indigenisation list of 346 products and systems (imported earlier) that would be procured domestically. In the last three years, the government has issued a list of 12300 products and systems.
Moreover, the focus has shifted to speedy approvals and awarding of projects resulting in higher revenue visibility. The government has been gradually investing and supporting domestic defence manufacturing to achieve self-reliance, create jobs, bolster forex earnings, and mitigate geopolitical risks.
That apart, India is emerging as a key exporter. According to data from the Department of Defence Production, defence exports reached Rs 21,083 crore (approximately $2.63 billion) in 2023-2024, a 32.5 percent increase from the previous year. This growth trajectory is expected to continue, with the Ministry of Defence targeting Rs 35,000 crore ($5 billion) in defence exports by 2025.
Except valuations, which are still a major concern in the case of headline defence stocks, the overall growth in the sector appears promising.
Railways: significant drop in order inflows
There are big expectations on railways because of the under investment in the sector during the past years. Capacity augmentation, modernisation, electrification, security, investment in metros, and rolling stocks are the major areas where huge investments are now planned.
However, in the near term one needs to be cautious in the light of high valuations and execution slippages. Most of the companies in the EPC space like IRCON, and RVNL have reported lower execution and a significant drop in order inflows resulting in lower visibility.
That said, downstream, companies which are working to support railways security, lighting, green initiatives (like pollution compliant products), solar, new Vande Bharat trains, metro trains, engines, and coaches are likely to benefit.
Chemicals: Import substitution focus
In the last few years, the competitive strength of Indian chemical players has been put to test. Dumping from China and the high dependence on a few chemical and pharma intermediates have been key concerns for the industry. Further, sunrise industries, such as battery chemicals, are seeing enhanced participation.
In this context, various sector-specific incentives to improve infrastructure such as effluent treatment plants, logistics, and power along with expanding the support for R&D initiatives are a possibility in the upcoming budget.
Further, policy initiatives focused on import substitution like PLI schemes can be extended to varied chemistry value chains.
In this backdrop, we like companies with spare capacities and strong execution profiles. Global interest rate easing cycle is also expected to support this sector.
Green energy: Stay selective
With the phasing out of subsidies on the purchase of electric vehicles (EVs), there has been a substantial drop in EV volumes as reported by original equipment manufacturers. Although the government has introduced a new initiative called the Electric Mobility Promotion Scheme 2024 to encourage the adoption and manufacturing of electric two-wheelers and electric three-wheelers, we expect FAME (Faster Adoption and Manufacturing of Hybrid and Electric Vehicles) subsidies to come back and be part of the upcoming budget, given the government’s focus on green energy.
The strength of the bull market has driven the valuation of stocks related to the green energy theme way ahead of fundamentals. This nixes the question of re-rating from here and creates a good case for pocketing the gains within these sectors. Amid the correction and volatility in the market, some of the companies that seem worthy of accumulation from a long-term perspective include Sona BLW, Amara Raja Energy & Mobility, and Exide industries.
Electronics: Budgetary support to accelerate Value Migration
The EMS (electronics manufacturing services) sector has seen rapid growth in the last few years, riding on the import-substitution theme. The bulk of this growth was led by electronics productions that have low entry barriers. These products included small appliances, air conditioners, cables, panels, scanners, PCBs etc. The Indian electronic design and manufacturing market grew 42 percent YoY to reach $25 billion in FY23 (~2 percent of the global market) and is expected to grow at a 32 percent CAGR till FY27. Rising competition in the industry will require all players to seek differentiation either by moving up and integrating into the value chain and/or manufacturing niche products by acquiring new capabilities to sustain the momentum.
We expect domestic manufacturing to remain a priority for the government and therefore should get budgetary support. This should accelerate value migration to intermediate & high-end precision components which were previously fully dependent on imports, especially in new areas such as semiconductors and IT hardware, including laptops, display panels, etc.
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