Indian equity markets
that are trading at 18 times price-to-earnings (PE) are factoring in earnings growth of 15 per cent over the medium term and remain the big ‘growth hope’ story for investors, say analysts at UBS Securities in an ‘India Strategy Report’ report led by Gautam Chhaochharia, their head of India research.
This growth in corporate earnings, UBS believes, can come about if the real gross domestic product (GDP) grows at 8 per cent-plus. This, UBS says, is achievable as manufacturing activity shifts away China.
can have further upside if our blue-sky scenario plays out. UBS Evidence Lab Surveys across Asia suggest that many chief financial officers (CFOs) are evaluating options for shifting manufacturing out of China, with India emerging as one of the preferred destinations,” the UBS report says.
UBS believes India's scale gives it an edge to gain from any shift, more so in terms of power generation, infrastructure availability, and local market size, but counter-intuitively less so in terms of skilled labour.
As a base case, UBS pegs India's real GDP growth between 7 and 7.5 per cent by 2023e wherein India’s market-share gains will be proportional to the share of ex-China exports to the US before tariffs were introduced. This is similar to the trend seen over the past few years and incorporates only a marginal gain in market share accruing to India due to diversification away from China.
The upside scenario sees the real GDP growth between 8 to 8.5 per cent by 2023e where India’s market share in US imports over the next five years improves similar to the levels seen in 2018. In this scenario, India will be able to gain around 20 per cent of the incremental market-share gain available due to a fall in China's share.
In its ‘blue-sky’ scenario, UBS sees real GDP growth between 8.5 to 9 per cent where India’s market share improves, more proportionately than that seen in the past. Considering the scale and size available in India, and as companies diversify away from China, UBS has assumed that India could gain 60 per cent of the incremental market-share gain available due to fall to China's share over the next five years.
“As seen from the experience of China, even before the liberalisation of the economy associated with China's entry into the WTO in 2001, it had gradually gained market share in world goods exports as it embarked on the reform path,” UBS says.
While on one hand the pick-up in exports will help the country help stabilise the rupee and increase forex earnings, UBS sees the uptick in real GDP aiding job creation over the next few years.
“For the three scenarios, our estimates of export-supported direct manufacturing jobs created range between 0.5 million and 4 million per annum (and a similar boost to indirect jobs creation as well). There may be likely at least one additional job created indirectly. This compares with 7 million people entering the workforce every year (35 million over the next five years),” the report says.
So, how can investors benefit from this? Apparels, chemicals, industrials and electronics sectors, UBS says, seem well poised to gain from this manufacturing shift.
"The bigger beneficiaries in terms of stocks, it says, should be from sectors benefitting from higher GDP growth. Of these, financials and autos are not pricing in the upside scenario, unlike consumers and cement, in our view," UBS' analysts say.