India manufacturing The sector is moving from basic assembly to deep technological localization, driven by massive domestic demand and targeted policy incentives. In this exclusive interview, Rakesh Sethiafund manager at HDFCAMCbreaks down the multi-year supercycle by explaining where the real structural winners lie across EMS, aerospaceAnd car auxiliaries and how to manage increasingly costly valuations.
Edited excerpts from a conversation with Rakesh Sethia:
How compelling will the Indian manufacturing story be over the next 5-10 years, and what are the key structural triggers that can support this cycle?
We remain positive about Indian manufacturing over the next 5-10 years. India’s greatest structural advantage lies in its large domestic market. Apart from China, India is now one of the few significant demand areas in categories such as automobiles, mobiles, air conditioners, solar modules, engines, cement and steel. This scale allows companies to increase their volumes, locate their suppliers and gradually become cost competitive.
The second driver is policy support through production-linked incentives (PLIs), capital expenditure incentives, infrastructure spending and supply chain realignment. The story is no longer just about low labor costs. It is now a matter of national scale, improved technological depth, better infrastructure, targeted policy support and gradual integration of India into global supply chains.
Which manufacturing subsectors currently offer the best risk-reward ratio: capital goods, industrial products, defense, EMS, automotive ancillary services, railways or chemicals?
Most of these manufacturing subsectors benefit from favorable structural factors, but the risk-reward ratio differs depending on valuation and execution visibility.
Even though we are selectively positive on capital goods and industrial products because the cycle is supported by renewable energy, transportation, electrification, automation and data centers, valuations in general have become very expensive.
In the electronic manufacturing services (EMS) sector, the opportunities are great, but we prefer companies that can move beyond assembly and into components, design, testing and export. In the automotive sector, we like powertrain-agnostic businesses, with higher content per vehicle, premiumization and export relevance.
Defense and railways are structurally attractive, but valuations and execution cycles need to be monitored carefully. Chemicals are more mixed. Commodity chemicals remain cyclical, while specialty chemicals and contract research, development and manufacturing organizations still have long-term opportunities through supply chain diversification.
At the portfolio level, we don’t buy just because a sector is attractive. We focus on bottom-up selection: business quality, return ratios, execution track record, margins, cash flow, balance sheet strength and valuation comfort.
EMS has become a major market theme over the past two years. Do you think this opportunity is still underexploited or that valuations are now higher than fundamentals?
We believe the SME opportunity is still underexploited, but stock selection is now very important.
The first phase of growth was largely about blending. The next phase of value creation should come from backward integration into components. Some consumer EMS fields, such as mobile and AC system assembly, are now relatively more mature. But the component ecosystem is still in its infancy. For example, PCB manufacturing in India accounts for less than 1% of the US$100 billion global market, while import dependence remains above 90%.
This is where the next stage of growth can come from. Under the Electronics Manufacturing Services (EMS) programme, around 55,000 crore investment has already been committed in 46 applications. This is expected to drive deeper localization and higher domestic value addition over time. The opportunity is great, but valuations already reflect a lot of optimism from some names.
Are Indian EMS players now moving up the value chain beyond assembly to higher margin design, exports and manufacturing?
Certainly, Indian EMS players are moving up the value chain, but it remains a gradual process.
India has gone beyond basic assembly in several areas. Companies now perform PCB assembly, testing, case construction, tooling, plastics, chargers, batteries, supply chain management and early original design work from manufacturers. But India is still far from China or Taiwan, where component ecosystems, supplier clusters and design capabilities have been built over decades.
The positive change is that political support is becoming more and more targeted. ECMS focuses on components and subassemblies, while the India Semiconductor Mission supports manufacturing plants, display factories, compound semiconductors, ATMP/OSAT and chip design.
The direction is positive, but value creation will be selective. Pure assemblers can grow revenue, but sustainable margins will come from companies that develop capabilities in localization, design, test depth, vertical integration and export relationships.
Automotive accessories remain a central theme in manufacturing. How are you positioning the portfolio amid EV transition, premiumization and export opportunities?
Automotive accessories remain a key manufacturing theme for us, but we are selective. Our positioning is aimed at companies benefiting from premiumization, higher content per vehicle and exports.
We don’t play EV as a binary theme; we prefer companies independent of the powertrain. We also like segments where India has a sustainable advantage, such as forging, foundry, machining and precision engineering. The focus is therefore on sustainable growth, export relevance, quality of execution and comfort of valuations, and not just on the EV narrative.
Aerospace stocks have seen strong traction over the past 1-2 months. How strong is the tailwind for the sector and are valuations still attractive?
We like aerospace from a top-down perspective. India is one of the fastest growing aviation markets in the world, and local manufacturing of components is still in its infancy. Over time, this may become a significant opportunity as global original equipment manufacturers (OEMs) diversify their supply chains and Indian companies develop precision manufacturing capabilities.
However, the opportunities listed remain limited. Much of the aerospace manufacturing ecosystem is currently in private entities, including some conglomerates that have stronger integration with OEM supply chains. In the space listed there are only a few names. Some are too small, while in others valuations have already become high. So, the sector tailwinds are strong, but the risk/reward in public markets is not uniformly attractive.