India’s manufacturing prowess is gradually gaining prominence in the aftermath of the Covid pandemic as global companies expand their supply chains to reduce dependence on China and other low-cost Asian manufacturing hubs. Commonly referred to as China+1, the strategy bodes well for Indian companies in sectors such as chemicals, electronic parts and automotive components. It will be prudent for investors to track companies in these sectors that will benefit over the long term.

Opportunities for Indian manufacturers are emerging due to ageing developed market capacities and improving returns on capital as China’s green manufacturing mandate makes it more expensive. According to a recent Morgan Stanley report, India’s share of manufacturing in total gross value added (GVA) is expected to increase to 21% by FY32 from 15.6% in FY22.

India is emerging as a viable alternative in the $1 trillion global speciality chemicals sector helped by process capabilities, lean cost structures, quality manufacturing assets and a track record of protection of intellectual property (IP) rights in process technologies. Companies such as Aarti Industries, Clean Science and Technology, Deepak Nitrite, Vinati Organics, SRF and Aether Industries may benefit from export and import substitution.

“Indian chemical companies are able to make products where the landed price for customers is lower than China due to process-driven R&D with superior IP,” said Aman Desai, executive director at Aether Industries. “That is attracting a lot of global companies to increase their allocation to Indian companies. We have increased demand for several products from our customers who are increasing allocation to India after they have delivery on 4MEP.”

Aether Industries commands over 28% market share in 4MEP, a key intermediate used in the production of metoprolol used to treat angina and hypertension. 4MEP was earlier made largely by Japanese and Chinese companies.

Similarly, Aarti Industries and Atul have gained prominence in the production of benzene derivatives and monochloroacetate, respectively, aided by differential process engineering. These opportunities, which were absent earlier due to predatory pricing by Chinese manufacturers, surfaced under the China+1 framework.

Another speciality chemicals company Clean Science is expanding its presence in hindered amine light stabilisers (HALS) through catalytic reaction with a global market of around $1 billion. In the agrochemicals segment, Indian companies including Heranba and Bharat Rasayan have gained a share from Chinese counterparts in pyrethroids.
To take advantage of the emerging scenario in global manufacturing, the government has implemented the production-linked incentive (PLI) scheme worth `41,000 crore to attract global contract manufacturers. In the global electronics system and design manufacturing (ESDM) segment, China has a share of 45.5% owing to cost-effectiveness and technological leadership. However, in the post-pandemic era, global electronics companies are looking for alternative manufacturing locations. This is likely to increase India’s share in global ESDM from the current 1.8%.

India has among the lowest labour costs and overheads, giving it a considerable advantage over China and most Southeast Asian countries. An analysis carried out by Invest India and the Electronic Industries Association Of India (ELCINA) shows wages in India are 46% cheaper than in China. This augurs well for companies such as Kaynes Technologies, Sryma SGS, Avalon and Amber Enterprises. Revenue of Indian ESDM companies has grown 30-40% annually in the past two years.

Kaynes is in the process of increasing capacity by four times in the next two years with a capital expenditure of `250 crore. Sryma SGS has a capex plan worth `571 crore spread over the next three years. “We are expecting around 50% of the incremental revenue in the long term to be driven by the China+1 strategy,” said Ramesh Kannan, managing director of Kaynes. The company supplies glucometers and printed circuit boards used in cars.

Global automakers are also getting into vendor diversification. After losing nearly 8 million units of production — equivalent to two years of India’s annual sales — due to Covid-related supply disruptions, global automakers are increasing allocation to Indian suppliers to minimise volume risks.

Vishal Rangwala, CEO of Harsha Engineering, a bearing cage maker, said a major customer has signalled its intent to shift China production to India. “We have seen nearly `100-150 crore incremental revenue due to increased allocation to India,” Rangwala said.