The Indian Government staring at slow growth for the past few quarters has come up with a plan to induce investment-led growth, by slashing tax rates for corporates by a headline 10% (actual impact would be closer to 5-6%, given the various incentives and exemptions already in place) and thereby improving average EPS by 8-10% for most companies in India. The stock market immediately took note and was up ~6% within a few hours.

But the more exciting bit was the new 15% tax rate for companies formed after October 01, 2019 and whose facilities are likely to start production by Mar 31, 2023. This is a good sign for the growth of manufacturing from a longer-term perspective as it makes India one of the most attractive destinations to set up new capacities. As long as the Government ensures actual ease of business also, and not only in terms of improving its rankings, it is quite likely that we are going to see a bump-up in manufacturing facilities in India. India can become the natural alternate base to facilities in China in the wake of growing trade-related tensions.

India offers multiple advantages over other South Asian economies: large workforce – even though it is not up to the mark yet, there are many new-age training formats being developed to narrow the skills gap; large domestic market – with a growing economy and a large population still at catch-up stage, the consumption-led growth story remains intact; excellent research and design facilities – the presence of world-class institutions allows for pockets of excellence to exist and a renewed boost from the industry can yield desired innovation at reasonable prices; and stable political scenario – the largest democracy in the world with multiple political parties having very similar economic agenda.

At Blue Lotus Capital, we have been bullish on sustainable growth in the Indian economy coming through manufacturing growth and have been investing with the conviction of resurgence in manufacturing for nearly 2 years now. Two-thirds of our portfolio is made up of high-quality manufacturing companies exporting to their global parents and customers across the world. It includes the Indian subsidiaries of the largest alloy wheel manufacturer from Japan, a Finnish food packaging company, a German specialized CVs manufacturer, an Indian MNC in water management solutions and largest tableware manufacturer in the country amongst others.

With the strong push for investment-led growth by cutting corporate taxes combined with the “Make in India” programme, our thesis becomes stronger, even though the major beneficiaries would be new players looking at India as a manufacturing base.

Our hypothesis is that the middle of the manufacturing pyramid (mid-sized companies with efficient management –the segment BLC invests in) will get offers to partner with new players looking to get a foothold in the country. Some of the smaller ones will become attractive acquisition targets also, especially for their local management capabilities and established supply chain and distribution networks, prerequisites for setting up large capacities here.

In the longer term, the trends in the IEM space (Industrial, Engineering and Manufacturing) that are exciting to us include innovations in manufacturing processes, access to technology, data science driven manufacturing and automation like robotics, 3-D printing, Internet of Goods (IoG), etc. The influx of new manufacturing facilities combined with India’s lead in information technology will make it a natural base for the development of some of these trends leading to exciting new investment avenues. Given our focused on-ground proprietary research and work in this domain, we are really excited about our portfolio and the new opportunities that have suddenly been thrown up by our investment thesis.