My basic degree is in commerce, professional training in Company law and my post graduation in management..... so its surprising I have spent so much time in manufacturing plants... I might have been a good engineer, I will never get to know, but I still love the look and feel of a manufacturing setup....
Most people who track the stock markets and keep track of that beast called the IIP will notice that the Decemeber number is lower, the last quarter has seen some slowing in the corporate earnings and I have started to hear how maybe the earnings growth will come down from the mighty numbers that drove the stock market frenzy to a large extent... But wait I have a theory about this....
A few quarters ago when the media and the so called protectors of "common man" were in a frenzy about inflation and the big daddies in the government were saying how some of this is supply led and how monetary measures would be ineffective, what they were saying was, we were heading up a capacity constraint in most of the agriculture related and manufacturing related sectors. So what was being done - the government/ RBI took measures to cool down the economy ( about which I have huge issues about how they went about it, but thats for a different post) , but what were industries upto during this phase? My guess (and here I am risking to make a statement without much analysis on data) is that corporates are building capacity. Manufacturing capacity is lumpy, takes time to come on tap and usually comes with a lag.... people who have analysed cyclical industries will see patterns of boom and bust driven by a cycle of - system inventory going down - capacity shortage - huge capacity addition - system inventory going up - price war - bam Bust ! - something similar is happening in India, capacity is coming up. But unlike the cyclicality, i think the Indian manufacturing industry will use this to improve their margins...How?
Most Indian manufacturing units are small compared to global standards, and although the best part of the last decade has been the improvement in efficiency , most of it I believe are work practice led efficiency gains, not technology led. So you had relatively small units with high shop floor efficiency driving profit improvement. Now the scale of operations for Indian units is changing, so people driven partly by tax breaks, are moving to places like Baddi, Rudrapur, Haridwar etc and setting up larger units and invariably with better technology. So the next wave of improvement is set to be driven by technology led efficiency ( and the assumption here is that the efficiency gains from work practice led improvement will not be lost ). Larger better technology led factories with scale economies slightly offset by additional logistics costs will keep the manufacturing margins high. So I would suggest look closely at those schedules in the Balance sheet and profit and loss, see Q-o-Q profitability improvement, remove seasonality and bet on Indian manufacturing for the next 3-5 years. ( Red Flag : Keep away from industries like Two wheelers, paper - where I think the segment might not be viable due to market dynamics for sometime). And you know what is the hidden zing you might get from all this - a one time bonanza since most Indian manufacturing is on the outskirts of cities (Peenya in Bangalore, Ambattur in chennai?, Mumbai) where land from the smaller factories will be freed up since manufacturing will become difficult to carry on since they will become closer and closer to prime residential areas.... so they will setup SPV/ spinoff companies, develop this real estate and push more of the production to the larger factories.
There is still one more wave after this where efficiency will come into play and that is the logistics improvement in factory gate - to intermediate distribution- to last mile distribution. Efficiency in terms of road infrastructure, de-bottlenecking out check posts ( remove the damn things you guys!!!!), warehousing, professional distributors etc. But these require fiscal measures and process improvement in this country..... and with what I think is the most inefficient goverment in the last decade at helm I dont see anything happening.
So bottomline - spend time on research, buy good Indian manufacturing companies and make some money.
There is an SEZ angle, outbound M&A angle and domestic market development angle to all this.... that might be part II to this post....
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