India’s renewed push to replace critical imports with locally manufactured products is creating a new cohort of stock market winners.
The beneficiaries of Prime Minister Narendra Modi’s import substitution drive range from producers of fertilizers and automotive heat shields to motor magnets. Fund managers are investing in these companies, betting they will benefit from India’s growth story.
A Bloomberg-compiled basket of 15 stocks linked to import substitution has rallied more than 20% since the start of the Middle East conflict, outperforming the benchmark NSE Nifty 50 Index, which has dropped about 2%. The rally stands out as the basket has become a haven for investors seeking shelter from broader market volatility.
“Import substitution can be decadal opportunity,” said Pawan Bharaddia, co-founder and chief investment officer at Equitree Capital. Companies replacing imported products enjoy a “blue-sky scenario” because they are targeting large, established markets historically served by foreign suppliers, he said.
Modi’s administration is doubling down on its “Make in India” initiative, first launched more than a decade ago, to reduce import dependence after the nation’s merchandise trade deficit ballooned to $333 billion during the financial year ending March. The drive has become more important as New Delhi relies on overseas suppliers for a wide range of strategic and industrial goods. That leaves the economy vulnerable to supply disruptions, widens the trade deficit and puts pressure on the rupee.
Last week, Modi’s cabinet approved financial support of 1.9 trillion rupees ($19.7 billion) to promote domestic chip and smartphone production. The government is also in the process of identifying more than 100 products, including electronics, chemicals and fertilizers for scaling up production, Bloomberg News reported this month.
Bharaddia lists shares of Shree Pushkar Chemicals & Fertilisers Ltd. and Talbros Automotive Components Ltd. in his portfolio. Shree Pushkar, which makes single super phosphate fertilizer used to improve soil fertility and enhance crop yields, is “clearly an import substitution game” supported by government policy and domestic capacity additions, he said.
To be sure, the biggest winners will be companies that pair policy support with globally competitive technology and manufacturing capabilities, according to Vallum Capital Advisors. The fund sees immediate opportunities in sectors such as solar equipment, electronics, semiconductors and drones.
“Import substitution alone isn’t enough for Indian manufacturers to become part of global supply chains,” said Manish Bhandari, portfolio manager at Vallum Capital. “Companies must demonstrate global quality, safety and technology standards.”
While state-run defense firms were beneficiaries of the early stages of the ‘Make in India’ campaign, specialty chemicals and power equipment firms are emerging as winners now, said Sumeet Rohra, a fund manager at Smartsun Capital Pte. in Singapore.
“India has to become self-reliant and this is a clear step toward that,” he said.
