HDFC Securities lists 5 stocks that will benefit from the Aatma Nirbhar Bharat push

Sustainable decline in oil prices is definitely very very positive for India, says Unmesh Sharma, Head - Institutional Equities.

Help us understand whether or not India Inc is really geared up to fill the gap if indeed manufacturing is to move away from China?
Government has taken a very strategic initiative in the middle of this crisis. We have always believed that the trend was moving in India’s direction in any case. It is just that this crisis has given the opportunity to accelerate that process. If you look globally, there is a move towards de-globalisation and a lot more of looking internally and this is not just India specific.

Add to that the problems where there were very serious supply chain disruptions in the short term due to the Covid crisis. So a lot of the manufacturers globally would like to do two things. One is to make their supply chains more secure, which means more diversification. And then there is geopolitics where at the margins there seems to be a little bit of tension between China and the rest of the world, especially the western world. So we believe that the government is doing the right thing. Our research team has done a fantastic report. They talk about how the major inputs to production, land, labour and cost had actually gone haywire in the last decade. All of those have started to correct and from that perspective, we believe this whole theme of self reliance, reduced competition from foreigners in the domestic market and supply chain moves away from China into India is a big theme for the next three to five years.

How geared up are individual sectors when it comes to manufacturing? Do you think companies have the potential to replicate the scale, size and quality that China has to offer as of now?
As you rightly said, this is a very sector-specific response. The first part is that there are certain sectors in which India has a natural advantage. There are certain engineering skills or specialty chemical space or pharmaceuticals or auto ancillaries where India can get into the global supply chain and we believe that the move will be a lot faster. Now as far as electronics and some of these other sectors are concerned, the supply chain shifts happen a lot longer.

In fact in our report we talk about the fact that this is not something on the newer sectors which is going to happen overnight. The infrastructure development, the engineering skills, the manpower, the capex itself and the availability of land continue to remain issues. While they have eased off with the moves taken by the government on taxes as well as land prices, we believe that things will move. Also, the electronic supply chain specifically; while we do not have any stocks which we can talk about here, at the same time it is extremely complex. We would be playing in an era where we would be importing raw materials and some goods and then adding value and exporting them back out again. So we believe that will take a lot longer. However, if you think about going back to my original point; specialty chemicals, pharma, auto ancillaries and competition in sectors where we have competition domestically not just on products but also on services will be a lot faster to get there.

Could you be a little more specific considering specialty chemicals is a very large and varied sector and so is pharmaceuticals? If we could name some that stand a chance to benefit from the Aatma Nirbhar Bharat push?
Our research team has come out with a few names like Alkyl Amines, Galaxy Surfactants followed by Navin Fluorine. These are the ones which stand out in the speciality chemicals and agro chemical space.

What about defence because that is also being looked at as a big sector where the Aatma Nirbhar Bharat push could actually come in?
If you look at the past, we believe since 2014 there were a lot of expectations on our side that things will move up a bit faster. However now it feels like we are going in that direction a lot faster than we were five years ago. Obviously the one that comes to mind right on top here is L&T followed by Bharat Forge on the defence side. There are other names which we have in the report. However, these are the two which we believe will be the beneficiaries of the defence theme.

Also wanted to understand what happens to the petro beneficiaries given the kind of fluctuation that we have seen in the last two months in just petrol prices?
In the oil and gas space, to some extent there is a little bit of benefit of de-globalisation. The raw material availability in the local market from the refiners actually improves a bit marginally but at the same time on the intermediate chemicals, there are also certain things in the petrochemical chain which we do import. So the net effect of that at this point in time is a little bit more tricky to gauge.

Having said that, on the refining side, if you look at the entire macro picture and at our model portfolio, what you notice is that India does benefit from the fact that oil prices have come off. That is great from another perspective and not just Aatma Nirbhar Bharat perspective. But sustainable decline in oil prices is definitely very very positive for us and as a result of that, the refineries are adding value to that and creating the finished products. So from that perspective, we are positive about this space. However, it is not the biggest beneficiary of Aatma Nirbhar in our view.