Credit Suisse said that steps such GST, lower corporate tax, bankruptcy law and labour reforms supported by coordinated tactical steps such as higher duties, import bans and non-tariff barriers, and focused incentives could help manufacturing emerge as a growth driver for India.
Investors have recently tiptoed back into value stocks, those that typically trade at low prices relative to their earnings.
The coronavirus pandemic has ushered in an opportunity for India’s electronic manufacturing and consumer durables market. Currently worth Rs 4 lakh crore, it is estimated to grow to Rs 6.5 lakh crore by financial year 2025, according to global brokerage and research firm Credit Suisse. “Import intensity is high, and the government is trying to capture more value domestically by imposing duties, standards/non-tariff barriers, and focused incentives such as production linked incentives,” Credit Suisse said in a recent report. To capture the trend, the brokerage firm has initiated the coverage of Amber Enterprises and Dixon Technologies with an ‘Outperform’ rating.
Credit Suisse said that steps such GST, lower corporate tax, bankruptcy law and labour reforms supported by coordinated tactical steps such as higher duties, import bans and non-tariff barriers, and focused incentives could help manufacturing emerge as a growth driver for India. India has moved to increase basic custom duty of various components of appliances to promote domestic manufacturing. Further the PLI scheme has been introduced which could act as a catalyst for manufacturing. Credit Suisse estimates that by financial year 2027 the scheme could generate $160 billion in new sales, and $70 billion of domestic value-add, thus adding 1.7% to FY27 GDP.
Credit Suisse sees a 29% upside potential for Amber Enterprises based on strong extant platform in terms of customers, catalyst of PLI and PMP approval for ACs, considerably reasonable valuations, among other reasons. Amber already has a strong presence in India with the firm contract manufacturing 25% of the ACs sold in India. 60% of its revenue comes from ACs while 40% originate from components and mobile applications. Amber has an opportunity to benefit from a growth in domestic AC penetration, aided by government policy support.
“Amber trades at P/E of 29/22x and EV/EBITDA of 17/13x on FY22/23E earnings. AC demand can surprise based on lower upfront prices, efficient power usage, stable power supply and tariffs, rising incomes and changing societal norms,” Credit Suisse said.
Shares of Dixon Technologies have sky-rockted 304% since March end this year. Despite this, Credit Suisse expects strong near term growth momentum and finds valuations to be reasonable on FY23E basis. Dixon Technologies is a leading EMS player with dominating presence in multiple product categories such as TVs, washing machines, LED bulbs, mobile phones, set top boxes, etc. “Dixon is one of the approved PLI participants for mobiles and sees Rs 300 bn of mobile manufacturing opportunity in mobiles, based on the scheme,” the report said.
Dixon has the opportunity to grow its product base by venturing into other categories or subcategories of what it already manufactures. “Dixon trades at 48/34 times FY22/FY23E earnings. Earnings estimates are likely to have a large dispersion given its growth outlook,” the brokerage firm said.