Thematic mutual funds focussing on manufacturing are doing well currently, having outperformed Nifty-50 and Nifty-500 handsomely over the past one, three and five years. With the addition of Canara Robeco Manufacturing Fund shortly (NFO closed on March 1), the theme will have eight participants. As domestic manufacturing gets priority focus from the government and industry players, the positive outlook can sustain over the next decade.

Spurt in manufacturing

The theme is backed by tailwinds from consumption growth, favourable shifts in global supply chains and an supportive policy framework.

India’s strong growth in consumption is the broad undercurrent for expected growth in manufacturing. Economies with more than $2,000 per capita GDP are expected to witness a rapid expansion in consumption and India, which has a GDP per capita of $2,600 currently, is expected to follow an exponential growth path.

Transition in global supply chain management away from China is another factor that is expected to boost domestic demand. Terms such as friend-shoring and near-shoring of supply chains is allied with the larger strategic intent of developed economies. India is showing encouraging signs in speciality chemicals, tiles, mobile phones, 2W and other industries, buoyed by the shifts in international trade.

Indian policymaking has so far been receptive of these shifts and is developing a policy framework that is supportive of manufacturing growth. Production Linked Incentives (PLI) is a pivotal step in that direction with a committed size of ₹2.63-lakh crores. The scheme has seen strong success in electronics and witnessing interest in textiles and mobile manufacturing sectors. Pharma, auto and alternate energy solutions are also expected to gain.

But on the flipside, investors should track the development of the manufacturing theme carefully. Manufacturing as a percentage of GDP has been range bound at 16 per cent for several decades and a transformation, if possible, should be a long-drawn-out affair. Even in the recent trends, India Inc has been struggling with volume drivers in its growth, which is visible in FMCG, retail and consumer facing sectors.

Government capital expenditure growth at 27 per cent CAGR in the last five years may most likely slow down to low double-digits to reign in fiscal deficit, which will most likely drag the overall economic expansion. While strong return metrics and deleveraged balance sheets are a strong support to private capex, the low base of private capex and range-bound growth in capex to 8-9 per cent may not be sufficient.

Performance matters

As can be seen in the table, the theme’s benchmark, S&P BSE India Manufacturing index, has outperformed both the broader indices over the last five years and three years owing to last year’s performance. Without last year’s outperformance, the benchmark would have performed in line with the indices.

Amongst the funds offering the thematic play, four have been launched in 2022 and one has been launched towards the end of 2023. All the funds have returned in line with the thematic benchmark in the last one year. Only Aditya Birla Sun Life Manufacturing and ICICI Prudential Manufacturing have more than five years of operations. Between the two, ICICI’s manufacturing fund has outperformed ABSL’s fund and the index over the last one, three and five years and quite significantly.

Portfolio construction

ICICI Prudential fund’s current portfolio is geared towards Automobiles, where close to a fifth of the fund is invested in Metals & Mining, Energy, Healthcare (each with 13.7 per cent in allocation) and Capital Goods (12.6 per cent) figure in the top five sectors as well. The above-mentioned sectors are in the midst of a strong upcycle. Auto’s are facing a strong order backlog apart from growing realisations and favourable product mix. Energy sector continues to deliver a strong bottomline growth owing to deficiency in power generation and cooling input commodity costs. Healthcare can be a broad sector including primarily pharmaceuticals and hospitals. But both sectors have strong tailwinds, especially hospitals with a shortage of services in the public sphere and increasing insurance coverage.