India's export-focussed companies are likely to emerge as the 'flavour' of stock markets

India's export-focussed companies are likely to emerge as the 'flavour' of stock markets as experts feel that the changing macro economic situation in China will favour India and, in the next couple of years, India is expected to steal a march over China in the global exports markets.

Rising wages in China, decrease in labour supply and appreciation of the Chinese yuan will tilt the scales in favour of India's export oriented companies. Well-established manufacturing companies which derive sizeable revenues from sectors such as textiles, chemicals, auto ancillaries and engineering are the ones which could see significant improvement in their revenues in coming years.

China had dominated the global exports market in the past 20 years, with several competitive advantages. Besides, China had relatively low labour wages, low cost of capital and more importantly, an under-valued currency. These factors helped China in emerging as a powerful 'manufacturing' hub.

But the intensity of China's competitiveness may come down in the next few years. "We anticipate a resurgence in India's manufactured exports, driven by favourable demographics, rising competitiveness and positive changes in the business environment," said Niraj Mansingka, associate director, wholesale capital markets, Edelweiss Financial Services.

There are reasons for this favourable view on India's exportoriented companies. According to a United Nations report, labour force is likely to decline in the next few years in China (see table).

According to an Edelweiss research, India's working age population, which stood at 78.1 crore in 2010, would grow at a compounded annual growth rate (CAGR) of 1.28% to 100 crore by 2030. This surge in 22.5 crore of working age population is expected to contribute 24.3% to the world's incremental working age population growth in the period mentioned.

On the other hand, China's working age population is likely to decline at a CAGR of 0.06% in the same period. Another factor that works towards India's competitiveness is the curb on shadow banking in China.

Shadow banking in China has provided the low-cost of capital to Chinese companies which could buy raw materials and also produce cheaper finished products. To curb shadow banking, the Chinese government intends to raise its retail deposit rate of 3.3%, which will increase the cost of capital for Chinese companies. In such a scenario, India may gain the most due to favourable demographics and a depreciated currency. Over the past four years, barring the South African rand, the Indian rupee has depreciated the most among the emerging economies.

"With advantages of labour, currency and capital costs waning, we estimate China's incremental export market share to decline.

Also, there has been a noteworthy increase in wages in China in the past three years. According to International Labour Organisation, for the past four years ending 2013, China's labour wages cost has increased 68% every year, while in the same period, India's wage cost has increased 47%. More so, in dollar terms (US dollar per hour), China's labour cost rose 90% in the past four years while India's wage cost rose amere 11%.

As a result, average wage in India is currently one-third that of China.

Lastly, it's the movement of Indian currency against the dollar as opposed to the movement of Chinese currency against the dollar that works in India's export-focused companies. In the last 10 years, the yuan has appreciated close to 33% against the US dollar while the rupee has depreciated close to 24% in the same period, providing better scope for India's companies. "We anticipate India to gain a commendable market share in sectors that require skill-based manufacturing such as fine chemicals and engineering, in sectors where the country has raw material advantage such as textiles and sectors that require large consumption base such as auto ancillaries.

Its global market share has increased in all these sub-segments in the past as well. Global cyclical uptick will be another catalyst to share gain," added Mansingka.

Companies such as Arvind, Triveni Turbine, Bharat Forge, Welspun India and Aarti Industries are expected to be major beneficiaries of the global recovery.

Besides achieving their expansion capacities, these companies have been increasing their global presence in the last few years.

"Last four years, China was focusing on the domestic economy. The Chinese government has withdrawn exports subsidies in various sectors. This would reduce the competitiveness of Chinese companies over India. Besides this, India has invested in capacity in the past few years. Hence, an increase in demand in global exports markets is going to work in favour of India," said S Krishnakumar, head equities, Sundaram Mutual Fund.

Source : economictimes.indiatimes.com