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Smallcaps that Could Gain from China plus One Tailwinds in the Manufacturing Sector

Feb 8, 2024

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Smallcaps that Could Gain from China plus One Tailwinds in the Manufacturing Sector

While going through the list of Padma Bhushan recently, I was surprised to see an unfamiliar name - Young Liu.

Turns out he is the head of Taiwan-based manufacturing giant- Hon Hai Precision Industry Co., also known as Foxconn.

Hon Hai plans to invest US$ 1.6 bn in India to expand iPhone production in the country, following a China plus one strategy. Also, its subsidiary has partnered with India's HCL group to set up a semiconductor JV (joint venture).

I think it's brilliant of Indian Government to acknowledge the manufacturing giant, and to create an environment that boosts the confidence of global players to make in India.

Foxconn is not a standalone case.

India seems to be riding the initial phase of a manufacturing wave, that goes beyond critical sectors like defence, aerospace and spacetech.

Tesla is another firm India is trying to get to its shores. The government is making sure it comes with a commitment of investing and manufacturing in India.

And then there is Tata Group, all set to be India's first homegrown iPhone maker.

The pandemic was a big shakeup for global supply chains. While it brought the economy to a screeching halt for a while, it also led to some positive structural changes and tailwinds for the Indian economy.

With stringent environmental norms emerging in China leading to closure of polluting factories and hike in wages, China was already losing its sheen as a manufacturing hub.

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However, COVISD was the force that led to the big shakeup in the global supply chains. The choking of the key ports and cities amid a zero-tolerance policy made the world realize that giving China the status of sole factory of the world was not in the long-term interest of business stabilities and continuity. The lesson was clear - it was time to look for factories beyond China.

While the pandemic has subsided, it is now the geopolitical tensions driving this shift in the global supply chains.

If India gets even a fraction of the China plus one opportunity, it could be a huge growth over our existing production base. Capitalizing this opportunity will require investment in capacities and supporting policies.

Manufacturing as a % of GDP

chart
Source: World Bank; Brazilian Institute of Geography and Statistics, Federal State Statistics Service Russia;
Ministry of Statistics and Programme Implementation India, IPO Jyoti CNC Automation.

No wonder then that the PLI schemes or production linked incentives have been extended to over a dozen sectors including bulk drugs, medical devices, semiconductors, telecom, white goods, electronics, and food processing, auto, defense and so on.

I believe Indian machine tools industry will be a big beneficiary of this trend.

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It is estimated that machining center market is likely to grow three times of the growth in manufactured goods sector (12% CAGR from FY23-FY27).

If you wish to ride this opportunity, do keep a close eye on companies that make CNC (computerised numerically controlled) machines. These machines are critical for precision and efficiency in mass manufacturing.

Their use extends to auto, industrial manufacturing, medical devices, automation and robotics, aerospace and defence, electronics, construction, and power, energy etc.

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Listed companies in this segment include Jyoti CNC Automation, Lokesh Machines, HMT, Lakshmi Machine Works, Macpower CNC.

These companies could potentially benefit both from increased manufacturing in India and from the import substitution.

Almost 46% of CNC machines are imported, so these companies deserve to be on your watchlist.

For more such updates on investment opportunities, stay tuned...

Warm regards,

Richa Agarwal
Richa Agarwal
Editor and Research Analyst, Hidden Treasure
Equitymaster Agora Research Private Limited (Research Analyst)

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