We expect manufacturing to be one of the key contributors to this growth

Manufacturing industries are major growth drivers of emerging markets. However, if we look at our broad market indices, manufacturing is underrepresented compared to services sector. What is the historical context for this?

Historically, the share of manufacturing to GDP has remained at roughly 16-17% levels. Also for a long period, India has been a net importer of goods. Compared to manufacturing countries like China, India faced logistics and trade barriers. In addition, given India’s educated and english speaking manpower, the services sector saw unprecedented growth, particularly in IT/ITES, export sectors etc. In the last decade, efforts in the renewable energy segment provided a big push to companies. Ongoing improvement in roads, ports and railways network helped in closing the logistics infrastructure gap and help improve productivity and export competitiveness. In terms of our broad market indices, one needs to understand that financial services, IT, FMCG sectors have had a larger representation in the indices and still continue to do so.

What are your views on the growth of manufacturing in India in the last two decades? What role FDI flows have played in the growth of manufacturing as an industry?

According to World Bank, India’s manufacturing sector as a proportion of GDP remains well below the world average as well as most peers. To make domestic manufacturing more competitive under Atmanirbhar Bharat (the “self-reliant India” campaign), in March 2020, the government introduced Production Linked Incentive (PLI) schemes to step up indigenous manufacturing capacities. On an aggregate basis, PLI schemes span 14 sectors with an expected total outlay of Rs 2.47trillion ($ 32.9bn). Also, a lower tax rate of 15% was introduced for new manufacturing companies and import duty on items increased in a phased manner to promote development of local manufacturing.

There have been substantial changes in last few years and this can be seen in the registration proportion of manufacturing companies that are up to 28% in CY22 vs 22% in CY18. The pandemic brought about changes in the global electronics and semiconductor industry triggering huge chip shortages and a shift in global value chains. India at one point was an importer of electronics and its import bill in the same was quite close to that of crude oil import. India presented an attractive alternative with its vast consumer market, skilled labour force, and improving infrastructure. In the last few years, the efforts made by the government helped position India as a significant player in these global value chains. Consequently, the country’s electronics and semiconductor products manufacturing sector has witnessed a quantum growth in the last decade. To set the context, in 2014, around 92% of the mobile devices sold in India were imported, whereas by 2022, 97% of the devices were manufactured in India.

India has witnessed a steady inflow of FPI funds in the last decade, indicating international investors' growing interest in the Indian market. Additionally, the government implemented several reforms to attract FDI, making it more conducive for foreign companies to establish a presence in the country and this can be seen in the inflows of more than $152 billion in the last decade. These factors have contributed to the positive sentiment surrounding India's potential as a China Plus One beneficiary.

What are your views on current market conditions and your outlook for the Indian manufacturing sector from a 3 to 5-year perspective?

2023 has been a good year for Indian markets. Our country has been in limelight for all the right reasons - an improving macroeconomic backdrop, tightly managed interest rates to tame inflation and a better economic growth rate than other economies. So far this year, India received inflows to the tune of $12.8 billion from foreign portfolio investments and $20.6 billion from domestic institutional investors. From being a consumption-oriented economy, India has been moving towards a consumption and investment led economy. The markets have reacted positively and rightly to this potential strength of the country. This can be seen in the equity indices touching all time highs. Year to end of November, the Nifty 50 has gained 11.2% while the BSE Sensex rose 10%. The Nifty Midcap 100 posted 36% gains and the Nifty Smallcap 100 saw 46% gains. Furthermore, both the BSE and NSE market capitalisation has crossed the $4 trillion mark recently catapulting India as the fifth country in this trillion dollar club.

Heading into 2024, we must remember that markets have had a good 2023 and could likely face bouts of consolidation. 2024 will be influenced in the first half by the Union Budget and the elections. Post that, India’s growth trajectory will remain on a firm footing led by a pick up in capex and industrial activity. Apart from elections, stronger economic growth and improving earnings outlook should bode well for equities over the next one year. As long as India has the right structural and fundamental themes, 2024 will be good for the investors. There is possibility of increased FII flows in 2024, given expectations around political stability and peaking / falling interest rate especially towards second half of the year. From a longer term perspective, ie 3-5 years, one should remember that markets may move through phases of growth and slowdown but India’s structural theme remains strong. We expect manufacturing to be one of the key contributors to this growth.

How have the PLIs affected Indian manufacturing?

Apart from various ease of doing business measures, the key fiscal support has been the Production Linked Incentive (PLI) Scheme. The government actively provided sector specific fiscal incentives particularly linked to production targets. The scheme which was first announced with 3 sectors in 2020 was rolled out to around 14 sectors.

As per data available, the government disbursed claims of Rs 31bn under these schemes by end-FY23. This accounts for roughly 1.1% of total Rs 2.81trn fiscal outlay allocated. For FY24 government earmarked Rs 81bn for PLI alone, with half of it reserved for electronics. The pharma segment saw good progress in terms of meeting the investment target, where close to 85% of envisaged investment already happened. Among the bigger sectors, PLI for large-scale electronics saw the most progress. However, one needs to be mindful of many factors to asses the impact of PLI. It is possible that in sectors like electronics the demand channels were quite strong or there was already some pre-existing momentum. Demand visibility could take some more time in other sectors especially in the B2B space. Furthermore, manufacturing requires a complex web of supply chains, including the need for raw materials where India still has significant import dependence and lacks the price competitiveness.

You are launching a manufacturing fund. What are the salient features of this fund?

The Axis India Manufacturing Fund aims to strategically invest in themes that are poised to benefit from the structural shifts in the Indian economy. The fund seeks to provide a diversified approach, reflecting the breadth and depth of India's manufacturing prowess. It is set to encompass a wide spectrum of industries, from capital goods and consumer durables to textiles and pharmaceuticals, thus offering investors a comprehensive avenue to participate in India's manufacturing success story. This fund will be complimentary to the large cap oriented portfolio. The fund will follow a bottom-up approach with a multi-cap stock selection strategy. In addition to adopting an active sectoral allocation and ‘Quality’ style of investing, the Axis India Manufacturing Fund would also be focusing on the under-represented segments of Indian listed markets.

How would you define your investment philosophy?

The Axis India Manufacturing Fund arrives at a critical juncture where India’s economy is being fuelled by strategic initiatives like 'Make in India', and a spate of reforms. This thematic fund, is designed to capitalize on India’s growing momentum, focusing on sectors that stand to redefine India’s industrial contours. At its core, the fund is a thematic fund that will be investing in 11 sectors across 66 industries, thereby allocating a minimum 80% to the manufacturing theme. We primarily follow bottom-up stock selection approach with a focus towards high quality and growth with strong fundamentals. There are four principles that the investment philosophy at Axis is driven by. These are: a) Strong corporate governance/Strong promoter pedigree, b) Secular growth rate of the sector, which is anywhere around 1.5 to 2x of GDP; c) Strong business model, which demonstrates its pricing power in the product category and the business it is in, and ultimately 4) Good ROE’s and cash flows

Can you shed some light on your portfolio construction and research methodology?

The latest offering is an open-ended equity scheme that represents the India manufacturing theme and will be benchmarked against the Nifty India Manufacturing TRI. The fund seeks to provide a diversified approach, reflecting the breadth and depth of India's manufacturing prowess. It is set to encompass a wide spectrum of industries, from capital goods and consumer durables to textiles and pharmaceuticals, thus offering investors a comprehensive avenue to participate in India's manufacturing success story. The fund will aim to identify companies across three segments of the Indian economy:

• Investments (Capex Cycle): Manufacturers investing in factory equipment and R&D to build production capacity.


• Consumption (Increasing Income leads to Premiumization): Industries with rising demand trajectory due to domestic consumption and premiumization narrative.


• Net Exports (Focus on Import Substitution): Focus on companies benefiting from India’s integration into the global supply chain.

Through this interview what message would you like to give to the investors and distributors for the Axis India manufacturing fund? What is the minimum tenure for investors looking to invest in the fund?

The manufacturing industry is a key driver of economic growth, and in the case of India, it holds the promise of not only bolstering the nation's economy but also transforming it into a global manufacturing powerhouse. With over a billion people, India possesses a vast pool of skilled and semi-skilled labor, providing a competitive edge in terms of cost-effective production. Moreover, the 'Make in India' initiative launched by the government underscores a commitment to enhancing the manufacturing ecosystem.

Against this backdrop, the Axis India Manufacturing Fund is designed to capitalize on India’s growing momentum, focusing on sectors that stand to redefine India’s industrial contours. Investors with a long-term investment horizon, at least 5 years or more should consider gaining exposure to the fund.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully