PremiumNEW DELHI: Private equity firms are betting strong on India's manufacturing sector, reversing a long spell of lacklustre private capital inflows into domestic manufacturing-led businesses. As India posits itself as a world-class manufacturing hub to take on its Asian peers, private equity (PE) players are turning their attention to Indian manufacturing businesses in a big way, according to speakers at the Mint India Investment Summit 2022.
Investment pipelines of large PE funds are reflecting this change.
"Over the last five or six years, we've invested in more than eight manufacturing led businesses, and our teams at present run over 35 manufacturing facilities across the country. We've taken deep bets on manufacturing led-businesses, and we're seeing that also change in our pipeline of investments, particularly in pharma. We made four investments in the last three years alone," Pankaj Patwari, Managing Director, Advent India PE Advisors told Mint.
According to India's first sovereign wealth fund NIIF, the National Investment & Infrastructure Fund, new investment opportunities in new-age manufacturing are finally booming.
"Unlike in outsourced services, we've never been a manufacturing hub of the world for the reasons that we didn't have world-class, design-led manufacturing at scale, except in a couple of sectors. The one thing that COVID-19 made all of us realize is that manufacturing as a sector is strategically as important to the country as infrastructure because when global supply chains break down, whether it's something as basic as vaccinations, or is semiconductors, battery storage etc, unless we have our own manufacturing facilities we suffer," said Padmanabh Sinha, executive director & chief investment officer, NIIF
He added, "What we have now is much stronger entrepreneurs and management teams, which is critical because as investors we are very focused on quality, particularly, when we're doing capital investing. We want to invest in businesses which will continue to be high growth. So future-ready manufacturing businesses are extremely important, which is why as a sovereign-linked fund our focus really is on new age manufacturing businesses, whether it is 5G equipment, TVs, battery storage, electronics, where the inflection point seems to be coming close."
Homegrown PE fund Motilal Oswal Private Equity Advisors, which has been backing various manufacturing focussed-businesses, expects that the next 5-10 years will see the creation of a favourable ecosystem to capitalise India’s unique position as companies look to develop a China + 1 strategy.
“We are seeing a number of compelling opportunities now available for investors. India can attract a lot of skill-based manufacturing as we have a very large pool of English-speakers in the population with specific skill sets. We are clearly seeing in some of the businesses why someone would come to India and not go to, for instance, China or any other geography. This is a strong combination of skill set and the opportunity itself. We’ll have to see that we can capitalise on that and we are hopeful that some of these things are going to pan out in the next five to ten years," Prakash Bagla, Director, Motilal Oswal Private Equity said.
In certain sectors like pharma and auto and auto components, Indian factories are already playing an increasingly important role globally, but there are issues around higher domestic-value add that need to be addressed.
“I think capital is not a constraint anymore, and neither is the ability to organize labour [for the industry]. I think we have moved to an era where we have to start leveraging technology to make our capital equipment and processes world-class so we can compete with the world. If we do that and start owning, or at least controlling, the primary technology with which we produce our goods, we will be well-positioned to become the factory of the world. There is a renassaince happening in Indian manufacturing. In the last three-four years, I have seen more excitement in manufacturing than ever before. There is a lot of high quality talent that's coming into this space and even the capital markets have appreciated that," said Vivek Vikram Singh, CEO and Managing Director of Sona Comstar, a leading automotive components supplier and exporter to ICE (internal combustion engines) and EV (electric vehicles) OEMs.
The legal and regulatory climate is also starting to change to aid domestic manufacturing businesses.
“From simple things like ease of doing business in India to making it easier to apply for licenses online, things have significantly improved, even though they may not be entirely hunky dory. We are also seeing a lot of healthy competition between states and manufacturing is being seen as a tool for social change, which is why states are also coming forward to provide infrastructure and incentives. think the other thing that we are seeing is that between the states there is a lot of good healthy competition," Yogesh Singh, Partner at law firm Trilegal said.
“However, we need to ensure our law and policies remain consistent. Whatever good work is being done can be taken away by one single regressive retrospective action, and today, the entire world is watching us and we need to be even more careful. Focus on R&D and making capital available to sectors such as defense should also be a focus area to make sure this applecart keeps moving," he added.
