A healthy correction in Indian shares after the national budget has paved the way for another round of accumulation, led by smart investors such as big foreign funds, on clearer signs of a turnaround. Companies with idling production lines have slowly started brimming again on the back of new orders, and business confidence is gaining strength.

Inflation pressures eased more than expected in June and exports grew in double-digits for the second month in a row, while industrial growth in May posted its best rise in 19 months compared with a contraction in the same month a year earlier. Revival in monsoon after a sluggish start should also provide some relief to policy makers and the manufacturing sector.

The annual four-month rainy season that begins in June is the primary source of irrigation for the country’s farmlands. Bountiful showers help agricultural output, keep a lid on food inflation and more importantly boost incomes in rural and semi-urban regions where a large chunk of India’s 1.3 billion people live.

As the nearly $2 trillion (Dh7.34 trillion) Indian economy is mainly driven by domestic markets, rural spending on a wide range of consumer products — from soaps to home appliances and electronic items to cars — is vital for the corporate sector.

“For the first time in the past five years, industrial companies are able to retain the benefits of lower raw materials cost again, suggesting that, within the product segments, utilisation has started to pick up or that capacity rationalisation commentary on margins is also now positive for the medium term,” Deutsche Bank analysts Manish Saxena and Chockalingam Narayanan said in a report.

They preferred “companies with operational, rather than financial, leverage” and recommended ABB India, Siemens India, Larsen and Toubro and Thermax. “Our blue-sky scenario for our top picks suggests that these stocks could be two to three times bigger over the next four to five years if demand picks up in a sedate manner.”

Manufacturing push

After years of adrift New Delhi is gearing up to give a major thrust to manufacturing, to raise its contribution to a quarter of total GDP from 15 per cent for the major part of the past decade. Originally proposed by the previous administration towards the fag end of its tenure, the plan is set to get a big push from the new government.

India has strong entrepreneurial enterprise, good designing skills, a budding young population and a huge domestic market. What it lacks is infrastructure, adequate logistics and above all a proactive government. The Bharatiya Janata Party-led alliance’s ascent to power after general elections has raised expectations for a business-friendly policy shift to make India a manufacturing hub.

Coincidently, this is an opportune time to set the ball rolling on this theme. China is losing its lustre as the manufacturing centre for the world market because of rising wages, higher property and other costs such as the firmer yuan.

“This, coupled with the fact that India has established itself as an engineering design-outsourcing hub, provides a window of opportunity for India’s exports,” analysts at Barclays Bank wrote in a report.

“We recommend that investors look to benefit from the theme of improving manufacturing export strength for India through exposure to sectors with high value additions and lower import content and with strategic positioning where the opportunity size could be considerable; example, in defence,” they said.

Based on these strengths the British bank picked seven stocks — Adani Ports & SEZ, Larsen & Toubro, Bharat Forge, Bajaj Auto, Havells India, Dr. Reddy’s Labs and Lupin — as having big potential for investors.

“We would avoid sectors that are dependent on government subsidises or cheaper access to raw materials for their competitiveness,” the bank said, citing Indian aluminium makers that were globally competitive because of their access to captive bauxite and coal mines. However, with coal now harder to get and rising energy costs are denting their outlook.

Earnings, fund raising

Tata Consultancy Services, India’s leading software services company that gets more than three-quarters of its revenue from the US and Europe, reported a 26.9 per cent jump in quarterly profit riding a wave of outsourcing deals. Consolidated net profit for the three months ended June grew to Rs50.58 billion (Dh3.07 billion) from Rs39.87 billion in the same period a year ago.

The earnings season will pick up next week with blue-chip companies such as energy conglomerate Reliance Industries, leading cement maker UltraTech Cement, No 2 private-sector lender HDFC Bank and third-ranked software services exporter Wipro scheduled to release their results. Among other companies set to announce quarterly figures next week are Axis Bank, Housing Development Finance Corp, Punjab National Bank, Canara Bank, Cairn India, Idea Cellular, ACC, Ambuja Cements and Asian Paints.

The top-30 Sensex recouped 2.5 per cent and the broader Nifty gained 2.7 per cent this week, to 25,641.56 and 7,663.90 respectively, after shedding more than 3.5 per cent the week before. Investment bank HSBC expects the Sensex to reach 27,300 by the end of the year.

Both the indices have gained more than a fifth so far this year, helped by foreign portfolio inflows of $11.45 billion. Encouraged by voracious global appetite for Indian risk capital, the government has started the process for stake sales in state-controlled companies to raise a record $10.5 billion in the current financial year that ends next March.

New Delhi this week invited bids from banks to manage a five per cent divestment in India’s biggest oil producer ONGC, a sale that could fetch nearly $3 billion. There are also plans to offload a 10 per cent holding in Coal India Ltd, the world’s biggest coal miner, which could raise about $4 billion. On Friday, the board of private-sector aluminium and copper producer Hindalco Industries Ltd approved a $830 million fund-raising plan, mainly through equity placement.

With an eye on improving outlook and growth potential global private-equity firms are also pursuing investment deals in India. US-based General Atlantic has reportedly held talks with search service provider Just Dial and online classifieds firm Info Edge to buy between 2 and 5 per cent in each of the companies.

— The writer is a journalist based in India