Very Bullish About Indian Manufacturing On Value-Added Side: WhiteOak Capital's Ramesh Mantri
There is a strong interest in India's manufacturing sector despite the fact that such businesses take longer to set up, he says.
(Source: Ramesh Mantri/LinkedIn)
India's manufacturing sector is yet to tap into its potential and a big leap is just round the corner, according to Ramesh Mantri, chief investment officer of WhiteOak Capital Asset Management Ltd.
In a conversation with NDTV Profit, Mantri said India, with its skilled labour and technical engineering expertise, is uniquely placed in the value-added manufacturing segment.
“I think on the value-added side, I am very bullish about manufacturing in India. Apart from electronics on the low value-added side, we have not seen much success yet," he said.
Mantri highlighted that there is strong interest in India's manufacturing sector despite the fact that such businesses take longer to set up.
"Unlike services, which can rent an office, hire people and go live in three months, here you need a few years for the process to scale up. Usually, it is a three-to-four-year cycle before things start scaling up. But there is a lot of interest in India and there is more manufacturing," Mantri said.
According to Mantri, India has made middle-order progress in electronics manufacturing but is yet to scale up in other sectors like toys and garments.
"On the low value-added side, there will be strictly assembly labour-intensive manufacturing. We have seen huge success in electronics manufacturing. A few companies have done extraordinarily well in public markets,” he said. "But this story has not flown to other parts of low-value, labour-intensive manufacturing like garments."
He said some of the companies operating in the low value-added manufacturing segment have the potential to scale up.
"I have seen companies (operating in low value-added manufacturing segments) that have added five times capacities in one shot. That tells you about the market," he said.
On the valuations of such companies, the CIO said many of these companies today were constrained by manufacturing capacities rather than demand.
In the current market situation, where the demand is high but capacity is low, Mantri suggested that paying higher valuations is better than a situation where companies have to compete for demand.
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Ramesh, how are you thinking about the current landscape because this opinion is divided right down the middle, that we are expensive, but not egregiously expensive, but at the same time, we are looking at, after four years of double-digit earnings growth, maybe a moderation in earnings growth as well, and could that impact the sentiment, if not flows. What do you think about it?
Ramesh Mantri: We are seeing in the last three, four months, significant slowdown in high-frequency indicators and one of the biggest reasons has been the lack of government spending. Now, government spending fell by 19% in the first half of this year, and this is very unique. In fact, our fiscal deficit is running at 20-year low in the first half. So basically, the government has money that is not spending, which is not a bad problem. It's not a difficult problem to solve. If you have money, you can always spend it. So that will help the economy. So that's creating that pressure point in the short term. It's also showing up in slower corporate tax growth. Personal tax growth is actually very good, but corporate tax growth has slowed down, which is the indicator of some slowdown in earnings.
Yes, market valuations are about 10-15% now higher than long-term averages. There are pockets of exuberance, particularly on the smaller cap side, and there's clearly value, still relative value on the large-cap side and in some sectors, while other sectors have lot of expectations built into them. So, it's a mixed bag.
I think the important part is we are not, I would say, significantly overvalued, that we have to worry about sentiments and about things and the good part is the twin problems that India is seeing on the macro side. One is, of course, the lack of government spending and the fact that the rates are still high relative to inflation. Those are easily soluble problems. Imagine the opposite problem, if the government didn't have money and we were running higher inflation, then you can't solve either of the problems. But today, both the problems are soluble and there is, of course, certain tailwinds in favour of India because of the geopolitics at work. So yes, when things are going to be good, the price is always going to be slightly higher. You can't have fundamentals good at prices being lower. That really happens in markets.
Ramesh, which is one part of the equation that the issues are not that big. I'm trying to think if the growth triggers are strong enough for Indian markets, whether it's the large-cap indices or specific portfolios to show very strong earnings growth as well as, therefore, capital appreciation. Is there a case for that or currently, it's a in cricket parlance, a swinging wicket, and it's better to safeguard the wicket, as opposed to try and make runs?
Ramesh Mantri: So, after four years of strong growth, this kind of growth in earnings is hard to replicate. We are getting some base effect in place now and as I said, as economic indicators are slowed down to start impacting corporates, we are seeing a lot even in the consumer sector about a fair amount of weakness.
So yes, you're right. That one has to be, I would say, keep a balanced approach. One needs to now look closely at asset allocation. Maybe start looking at an even more balanced approach. Avoid real pockets of exuberance, which are in small caps and micro caps and be more tempted with large caps and avoid sectors with a lot of exuberance.
Okay, avoid sectors with lots of exuberance. That would mean a lot of sectors. Ramesh, I'm trying to understand this. Okay, so let me try and understand first. Is the portfolio strategy, a bit of a barbell approach, wherein you're probably veering towards pockets of value, but at the same time, because you guys follow this approach of having an Opco and a Finco, and therefore, your valuation models are different than what the street might usually follow. So, I'm trying to understand, how is it that you're building out the portfolio currently?
Ramesh Mantri: You know, where we see opportunity is in the BFSI, in Pharma and Healthcare, in Technology, we are more neutral. We are clearly seeing, you know, that there are pockets of very high growth in India, which is basically, I would say, a lot of tech-led businesses, some of them have gone public in the last three, four years, in the markets, where there is very strong growth and then there are strong pockets of growth, like saying electronics manufacturing, on the power side, and of course, select jewellery retailers and then there's a company like in apparel retailing that's growing like, very difficult to understand in this kind of economic environment at those rates.
So those pockets of growth where the growth is very high in India, those of course, valuations, while are not cheap by any measures, but still tolerable, while value is clearly there on the banking side, on Pharma, on I.T. also if growth comes value is going to be there in I.T. also.
That's interesting. Ramesh, a bit of a here and now there. The numbers. I mean, you can argue that TCS did well. HCLTech did quite the other, in terms of commentary, really, if you will or maybe not so much. But the ISG data that came out overnight seem to suggest that deal making activity is actually at multi quarter highs as well.
I remember conversations with even managements which said that some of their clients are saying that nothing until the elections are out of the way. Elections are one month away. Do you sense the possibility of even multiples or earnings, or both seeing a thumbs up post the US elections are out. Can it be IT's year, CY'25?
Ramesh Mantri: It's difficult to say this. You know that there is going to be IT's year or not. But one thing is there that, of course, the U.S. elections are an event, and things tend to go slow now. So, I think irrespective of the U.S. elections outcome, things will start moving from there. Remember, these companies fundamentally are leveraged to global growth, particularly in the U.S. and Europe. So it's going to be a function of economic growth.
I am very clear technology is here to stay and become a larger portion of our lives. So all the changes that you're seeing on AI and all the innovation that's happening will incrementally lead to more technology spending. It's then up to increment whether each company, how are they placed. I will still say there are a number of mid-cap and small-cap I.T. services companies of India who will still grow in double digit dollar terms in this year.
There are pockets of growth within the I.T. landscape. Be it product companies, be it cyber security firms, one or two, etc, which are all showing some pretty good growth in the recent past?
Ramesh Mantri: Yes, so I would say that the number of mid-cap and small-cap I.T. services companies that will grow in double digit in dollar terms this year, and if growth accelerates there, some of them will start growing 20% more in dollar terms.
Then, there are product companies which are also growing in the same ballpark. So, we don't have to focus entirely on the large caps. In fact, the large caps invariably are the slower growing companies in the sector now for many years.
So avoid the large caps. That's the first point or not necessarily, you can do your own research. But Ramesh Mantri is saying that there are a clutch of broader end of the spectrum companies in the I.T. space which could be doing well and could be looked at. I mean, viewers, please do your own due diligence.
The other one Ramesh is, before I get to manufacturing is this whole thing around the capital marketplace because that bucket of last three months commentary was crowded around regulatory action and what it could do. Somehow, the numbers from whether asset management firms, broking firms, pipe companies, exchanges as well, has not been bad at all, and now it's a very widely listed and represented sector in the capital markets. What do you think about this?
Ramesh Mantri: I think financialisation of savings and wealth management is a mega trend in India. I think it's going to be good for a long, long time there. So while there can be regulatory hiccups in the short term, I think the big underlying trend is very strong for a long time. So we believe there's a large opportunity in this space across a variety of business models that exist, from exchanges to asset management companies to service providers and the ecosystem and remember, regulatory action was only focused on brokers and local exchanges, not so much on wealth management firms and asset management companies.
So this was very broad, I think fast growing. I would say India is where the U.S. was in the 90s, in the financialisation of savings, and you have a great at least a couple of decades, great decades ahead of you.
Wow. So Ramesh, people lose sight of the woods for the trees, right? Would you mean, because things like this happen a lot of times, some things when they turn at times, people misunderstand the size of the opportunity and the length of the opportunity I'm trying to understand. Would you believe, as things stand, it could change, but as things stand, would you believe that the opportunity size for financialisation of savings and capital market related entities could actually be 15-20 years and firms can be materially larger than what they are right now?
Ramesh Mantri: I have no doubt about this. You know, when I go on a train, a police constable asks me for advice on what SIP to do, tells me more mass we are doing right now, from trying to make a fixed deposit to, you know, asking advice on SIP tells me. That's the potential. I think it's our, in fact, failure not to harness it now. But the market is there.
Well, a bit of a fall, but let's see what happens here. Now, let's shift focus. We have 10 minutes on the show. I'd love to understand from Ramesh about the India Manufacturing Story, because I know Ramesh that you've looked at opportunities, you've looked at businesses, and not the renaissance really of manufacturing that probably started two, three years ago, but there are a stellar number of companies which have made their presence felt by some unique manufacturing capabilities.
Do you believe this sector also is here to stay and while there might be temporary valuation or order flow led mismatches, the longer term looks strong?
Ramesh Mantri: No, I clearly believe with India's skilled labour and technical engineering skills, we are uniquely placed in value-added manufacturing services. We have yet to get our act right at scale on the low-cost manufacturing, except in electronics manufacturing where India made a lot of progress. But spaces like garments. toys, a lot of low-value-added, we are yet to make a play. But in the high value-added space, which is I'm talking of complex engineered parts, aerospace parts, industrial items, already there is a lot of progress happening.
Remember, unlike a services company, which can rent an office and can go live in three months, people will go live here. Here you need to acquire land, get approvals, set up a plant which takes two years, stabilise the plant, and then scale up. So, you know, any process takes a few years to scale up to happen. It's usually a three-to-four-year cycle before things start scaling up. But there is a lot of interest in India, more manufacturing to India.
Following stories, Germany has been rapidly losing competitiveness in manufacturing. A lot of plants are shutting down in Germany, across industries and clearly there is a shift in manufacturing happening. I think on the value-added side, I'm very bullish about manufacturing in India, apart from electronics. On the low value-added side, we have not seen a lot of success yet.
Could you elaborate that point when you say value-added and you classified or clarified by saying that there is some small value add happening in electronics, and if I got that right, but you are saying that that's not all. There are other things to play in manufacturing on the valuated side. Could you just give us some sense of what you're trying to say?
Ramesh Mantri: So, what I'm trying to say is, whenever India has to make Auto components, Pharma, Chemicals industrial items. In Aerospace, Defence, Industrial parts. We are making a lot of progress across companies, and these are typically engineered items, which require a lot of technical skills, you know, and also complex machines which is where India's making a lot of progress as we speak.
On the low value-added, which is basically assembly and labour-intensive manufacturing, we've already seen a huge success in electronics manufacturing. The rapid scale up India has done in mobile manufacturing, TV manufacturing, and now I.T. hardware. A few companies have done extraordinarily in public markets. But this story of manufacturing hasn't moved to other parts of the low value labour-intensive manufacturing, for example, garmenting, where we are not scaled up as yet.
The other interesting thing was that I've heard from so many people about some very niche manufacturing prowess in the country. I mean, the company is making unique products for even Tesla or Global Aerospace companies and that whole belt of manufacturing that has come up, it's quite stunning to see there. Valuations, you don't think markets have run amok. You believe that there are pockets of value here?
Ramesh Mantri: See, India is a growth market for manufacturing. So, valuations are not cheap. I think some of these companies will scale up. I have seen companies which have added 5x capacity in one shot. You know, just imagine adding 5x manufacturing capacity in one shot. That tells you the market.
So many of these companies today are constrained by manufacturing capacity rather than demand. So, when you have that situation, you are okay to pay higher valuations than a situation where companies have to fight for demand.
I have two more things to understand from Ramesh. The last question I'm going to keep on is consumer tech, food delivery and the likes. But before that, since we are talking of manufacturing Ramesh, just drawing your attention here and viewers, you can see this as well. This is the power play of India, as per CEA, Crisil and a consulting firm about what is the kind of installed capacity as of March 2024, Coal accounted for a lion’s share.
There's some bit of there in renewables as well and large Hydro and look at what the belief is expected, installed capacity by fiscal 2030, Coal share hardly moves up. What really drives up higher is renewable in a meaningful way, some bit of large hydro as well. Remember, nuclear didn't become a large powerhouse until many years ago. Ramesh. how does one play this, if at all, is this already discounted? Are there ways to play this whole push towards renewables that India has embarked upon?
Ramesh Mantri: First, I think Energy is structured growth. So, any country cannot grow without per-capita income, without a significant increase in per capita energy consumption, and the most efficient form of that is power. So, power demand is growing, and India is particularly facing an accurate shortage of peak demand power. Remember, renewables, because of their variability, cannot solve the peak demand power, particularly in the evenings in India when the sun is not there, and wind tends to be very variable. So, you need alternate solutions.
We are still resorting to Thermal, because thermal, you know, and nuclear capacity, but I believe the structural solutions and there is also an attempt to build a pump hydro. But remember, hydro are long gas station projects, so we'll continue to remain deficit in the evening market for some time. I think the solution will happen in batteries, green scale batteries. Even in the last three months, we are surprised at the pace at which grid battery prices have fallen, and I think in three to five years, Solar Plus batteries will start competing with Turbo. So that is going to be really the long-term sustainable solution to power in India.
Now there are many ways to participate in many ways. I believe one simple way is to invest through power financials. Other, of course, is within there a lot of Capex is going to happen by utilities and growth is going to happen by utilities. But remember, this is going to be very capital intensive. So utilities have to keep raising money, both equity and debt to grow. So I would actually play this space more through equipment companies where there is significant shortage. So whether it's transformers, you know, conductors, cables, and then there are substations and of course, specialist EPC companies in this space. So, within that whole power ecosystem, we'd like to play more through equipment companies and also through power financials, and less through utilities themselves.
Less through utilities. I think that's a telling point, too. So, keep that in mind. By the way, speaking of that, just wondering if transformers and rectifiers are completely off, I'm not saying Ramesh recommended it, but just look at that stock again, three and a half percent higher. You heard the management a few days back and the growth prospects that they're talking about. Very interesting move over there.
Ramesh, my final question is on Consumer Tech, and you know the whole conversation of what's happening, in a flurry of notes around food delivery, for example, right? I mean, I just wanted to understand from you when I go through notes on Zomato, for example, I am not asking you to comment on Zomato, but when I go through notes on Zomato, most of them suggest that growth, growth is coming in from GOV growth, while the AOE growth is kind of muted and that's the expectation. So is it to say that growth will come in from a higher user base, or will the wallet share also expand because I would like to believe this is still a nascent industry. So why is AOE growth showing muted trends?
Ramesh Mantri: No, if your growth average order values may not cost so much in India, but actually revenue growth requires more. You see growth happen because of three reasons. One is simple, average order value going up, more users and more usage. So clearly in India, the potential for the markets to grow has to be on the more users and more usage and the exciting story about you know, the likes of these food delivery platforms, is not so much now food delivery, which probably grow at 15-20% long term, I think the hyper growth is going to come on the Quick Commerce side, and where their business model is completely disruptive to the Kirana format, to the large retailers or modern retailers, and also to the likes of Flipkart and Amazon.
So, this is really the game-changing story in these companies and quick commerce is a uniquely Indian business model. Probably, it will get extended to some emerging markets. It doesn't work in the western world but is a very unique solution to the design of Indian markets and the Indian consumer, the needs of the Indian consumer.
In some sense I love the business model because it also solves the issue of employment, right? People can argue all that they want about gig workers and their rights, etc, and all of that is important. But the point being that there is a large labour force getting employment, which I somehow love Ramesh. I don't know what you think about it, but I really love it.
Ramesh Mantri: The fact that I think people miss this point that actually it's creating a lot of jobs because this is a labour-intensive operation. So actually, on a net basis, these companies actually end up creating more jobs than other retail counters. That's a very important point you talked about.
