How China-West tension is boosting the appeal of Indian stock markets

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Indian companies release their September quarter results around the Diwali festival, the peak season for domestic consumption. It’s no surprise, then, that analysts are doing a reality check on the nation’s more than a billion home buyers: how many of them have taken out a home loan, ordered a new coat of paint, bought a phone ? There’s a more pressing question this year: how did Dixon do it?

Even last year, stocks like Dixon Technologies (India) Ltd., which makes LED TVs for Samsung Electronics Co., or Amber Enterprises India Ltd., an air conditioning parts supplier for LG Electronics Inc., were entities relatively unknown. But now there’s growing excitement around local companies that could one day become as big and big as contract manufacturing giant Flex Ltd., formerly Flextronics.

The reason for this optimism is firmly rooted in geopolitics. The short-lived rout in Chinese equities following President Xi Jinping’s ascension to an unprecedented third term was a wake-up call. As Beijing threatens to break away from the economic and political orbit of the West under its leader, multinational corporations need a back-up place to manufacture gadgets. And when it comes to implementing a China+1 strategy, who has a bigger labor pool than India?

The stock market takes note of the order flow. After increasing six-fold in two and a half years, Dixon’s market value now exceeds $3 billion. Taiwanese PC maker Acer Inc. announced a partnership with the Indian company last year. Based in Noida, a suburb of New Delhi, Dixon already manufactures monitors for Dell Inc. and will soon begin producing Android-based smart TVs under a sub-license from Alphabet Inc. Sales have increased by 38% and profits were up 23% from a year earlier in the September quarter.

Analysts are super optimistic. Nirmal Bang, a Mumbai-based brokerage, expects compound annual growth in profits of more than 52% between 2022 and 2025. Jefferies Financial Group Inc. is eyeing an even faster increase in profits – 63% per year. year over three years. “We view Dixon as a structural play on indigenization,” the researchers state.

India as a risk-mitigation tactic – a hedge against China making all the gadgets – is a story that piques investor interest and helps justify lofty valuations. The premium of Indian equities over emerging market equities is currently three standard deviations above the 10-year average. There’s a lot of nervousness, though. Apart from domestic banks, whose asset quality and margins have improved, some of the other investment themes look tired, at least temporarily.

Yes, the worst of the inflation spurt is likely over, and the Reserve Bank of India may be close to a pause in its interest rate cycle. But pricing pressures are still high. As festival season approached, quarterly consumption volumes had declined by 1% per year for the past three years. Unilever Plc’s local unit is sitting on its lowest gross margin in several years. The software services industry, for which India is world famous, is facing weak demand from European customers even as it battles high employee attrition in the country.

Dixon, meanwhile, is eligible for Indian government subsidies under five different production-related incentive schemes.

For a resource-constrained economy scarred by the pandemic, Prime Minister Narendra Modi’s five-year, $24 billion industrial policy is a costly gamble on manufacturing. This money was needed more urgently for education, health care, and inadequate urban infrastructure that creaked under freak weather. Raising import tariffs to give the “Make in India” project a protectionist edge is something New Delhi has attempted in its own socialist past – with disastrous consequences.

Dixon wouldn’t mind being treated like a national champion of some sort. Neither does the stock market. However, the real lever that could tip the scales in favor of the second most populous nation lies with the CEOs of Fortune 500 companies. If China+1 is a real theme in India this Diwali, it’s more about Xi and his frayed relationship with the West than Modi and his politics.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.

This story was published from a news feed with no text edits. Only the title has been changed.

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