Daily Voice | According to this fund manager, electronics manufacturing space is a sunrise sector - Moneycontrol

"The Indian EMS market is a sunrise sector with significant opportunities, creating a super cycle similar to what was witnessed in IT/ITES and specialty chemicals," Manish Jain, Fund Manager, Coffee Can PMS at Ambit Asset Management says in an interview to Moneycontrol.

On the IT space, which gained 12 percent year-to-date (YTD), he finds the sector attractive from a medium to longer-term perspective, given a 2-5 percent payout yield and a 30 percent+ RoIC (return on invested capital).

In the equity markets, Manish with nearly two decades of experience in research and investment still views every dip as an opportunity to buy as he firmly believes that India is on a strong path fundamentally. GDP growth, fiscal deficit, currency, and government capex are all robust, he adds.

Do you think the lower monsoon will not impact the rural recovery seen in the coming months?

Undoubtedly, the monsoons have not met expectations, which will impact the kharif crop output. While this may keep food inflation elevated in the near term, the silver lining is that over the last decade, the share of agriculture in overall rural income has reduced dramatically. With the elections coming up and WPI inflation remaining soft, we believe that overall rural demand should hold up.

Is it time to be cautious about FMCG and consumption space?

The margin expansion in the last quarter has been quite significant; however, we believe that it is already more than factored into the valuations. On the other hand, growth has remained soft, which is a cause for concern. We believe that H125 earnings could come under pressure as margins normalize. Therefore, we remain cautious in this sector.

Are you betting on the electronics manufacturing space?

The Indian EMS market is a sunrise sector with significant opportunities, creating a super cycle similar to what was witnessed in IT/ITES and specialty chemicals. We are interested in this sector for the following reasons:

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Huge import substitution opportunity: The government's import substitution initiatives aim to manufacture electronic components locally through schemes such as the PLI scheme, Electronics Manufacturing Clusters, Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS), etc.

Export Opportunity: Vast export opportunities are unfolding, especially for the US and European firms following the China+1 strategy. Indian firms are now the preferred suppliers, which de-risks them from high dependence on China. India’s low-cost labor, in comparison to China, and favorable government policies are slated to drive large-scale capacities for domestic players.

Shift from Assembly Line to Full-Scale Design and Production: Indian EMS players are now focusing on in-house design and development for products, from PCB to end products. This shift will help improve margins as the ODM share rises and increase the reliability factor for their customers.

Runway for Growth: History shows how global EMS companies achieved unrelenting high growth for nearly two decades following their entry into China in the 1980s.

What is your take on the utilities?

The demand in the power sector continues to remain high, and several fundamental changes have occurred in the last couple of years. However, we choose to stay away from this space due to the regulated and cyclical nature of the industry.

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Do you think the worst is over for the IT sector and is it the right time to accumulate stocks for another possible bull run?

Commentary from IT companies has not changed much since Q1FY24, and there's not much sign of a turnaround at the ground level. However, the situation doesn't seem to be worsening either, and with expectations of an improving macro environment and stabilizing interest rates, tech spending by enterprises should bounce back starting CY24 when budgets are refreshed.

Over the longer term, we expect the growth rate to be higher than the pre-COVID level but below the FY21-22 spike. In that context, we find the sector attractive from a medium to longer-term perspective, given a 2-5 percent payout yield and a 30 percent+ RoIC (return on invested capital).

However, performance over the near term could be volatile and dependent on the macro environment. The Nifty IT index YTD is up ~12 percent (+8 percent for Nifty 50), with most non-Index (Nifty IT) stocks up in the range of 20-160 percent. Therefore, near-term performance might be lumpy and vary across companies.

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Do you think the next year is going to be crucial for the equity market given the states and general elections?

We firmly believe that India is on a strong path fundamentally. GDP growth, fiscal deficit, currency, and government capex are robust. In this context, short-term volatility may persist due to election results, but ultimately, we expect the markets to move beyond that and remain fundamentally driven. Therefore, we view every dip as an opportunity to buy.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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