Home >Markets >Mark To Market >As India-China border tensions intensify, some key sectors are caught in the crossfire
India is dependent on China for compressors, which forms 30-35% of the total cost of air conditioners, and very few consumer durables firms have meaningful in-house manufacturing capabilities (Bloomberg)
India is dependent on China for compressors, which forms 30-35% of the total cost of air conditioners, and very few consumer durables firms have meaningful in-house manufacturing capabilities (Bloomberg)

As India-China border tensions intensify, some key sectors are caught in the crossfire

  • Indian drug makers are heavily dependent on China for active pharmaceutical ingredients (APIs)
  • The Indian consumer durables sector has close linkages with China

While patriotism is a virtue, jingoism is a vice," Justice Gita Mittal said during her tenure as acting Chief Justice of Delhi high court. With voices of boycotting Chinese products increasing by the day, the line where patriotism ends and jingoism starts is getting a bit blurred. A number of sectors dependent on Chinese goods for critical inputs risk collateral damage.

“It’s good posturing to say boycott Chinese goods, but you have to be ready to produce on your own, and I don’t see India being ready in the near to medium term," said Ravi Sundar Muthukrishnan, head- institutional equity research, Elara Securities (India) Pvt. Ltd.

Against this backdrop, here’s a look at some sectors that would be most affected.

The great gap
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The great gap

Pharmaceuticals: Indian drug makers are heavily dependent on China for active pharmaceutical ingredients (APIs). According to JM Financial Institutional Securities Ltd, “Indian drug makers import about 70% of API requirement from China with imports from the country increasing steadily over the years (from about 62% in FY12 to about 68% in FY19)." Note that Chinese API manufacturers have an advantage over India in terms of cost competitiveness, thanks to their scale benefits. Needless to say, an import ban on Chinese pharma-related products may lead to supply-chain disruptions for Indian firms. This, in turn, may mean adverse price movements, increasing costs for domestic firms, say analysts.

Consumer durables: The Indian consumer durables sector has close linkages with China. India is dependent on China for compressors, which forms 30-35% of the total cost of air conditioners, and very few consumer durables firms have meaningful in-house manufacturing capabilities. “In fact, barring Havells India Ltd, which has more than 90% of its content manufactured in-house, for other firms, it ranges between 20-60%," point out analysts from Motilal Oswal Financial Services Ltd in a report on 23 June. “Even Havells is dependent on China for some intermediary components, but the overall proportion is quite low compared to peers," added the broking firm.

Auto: The industry’s direct as well as indirect imports through suppliers is at significant levels, and can disrupt operations. The saving grace, of course, is that production capacities are running low. “The largest import is alloy wheels...but since plants are yet to reach full capacity, the impact would be small," analysts at JM Financial said, detailing the impact on two-wheeler major Bajaj Auto Ltd.

China is a key supplier of sub-components used in engine, electrical/electronics, tyres, analysts at Motilal Oswal said.

Telecom: China caters to a majority of smartphone demand in India and even globally. Therefore, any disruptions will result in a spike in smartphone prices and probably lead to a delay in the adoption of new technologies such as 5G. Further, it could also slow the pace of subscriber additions. Additionally, the network equipment market has just a handful of firms. In case of disruptions, analysts said capex of firms such as Bharti Airtel Ltd and Vodafone Idea Ltd could rise marginally.

Power: India imports a vast portion of its solar modules from China. According to Jefferies India Pvt. Ltd, the “(renewable energy) ministry’s 100GW solar capacity target by FY22E versus 35GW end May 2020 is a tall ask as discoms are struggling financially. Recent bids are viable only based on Chinese imports, as modules manufactured in India are far more expensive." A move to curb imports in under-construction solar projects can be expected to lead to tariff revisions. Import curbs here also entail risks of project delays.

Chemicals and agro chemicals: The Indian agrochemical industry imports a high amount of raw materials from China. According to Motilal Oswal, the import dependency ranges between 10-50% depending on the product portfolio. “The companies with generic product portfolios have higher dependency for raw material from China," said the broking firm, adding, “The specialty chemical sector has relatively lower dependency on China for raw material."

Infrastructure: On the flip side, some domestic capital goods firms may potentially benefit from the re-look at ties with China. In a report on 21 June, analysts from Jefferies India said, “$1 billion rail projects won in joint venture (JV) with Chinese players in the past five years. Key reasons for Indian firms to enter in JVs are technical expertise and a means to reduce competition through partnership. Incrementally, $10 billion-plus tenders are in the pipeline in metro rails in different states." If bidding is restricted for Chinese companies for larger projects, Indian companies may well benefit.

In the long-term, many analysts agree tensions between both nations would give a push to the Make in India initiative. This would help India become self-reliant and create more employment opportunities. According to Rajiv Sharma, head of research, SBICAP Securities Ltd, “However, this is not going to happen overnight and may take a while to pan out. Within this, even as raw material dependency is challenging to overcome sometimes, given that some places are naturally blessed, India can go a long way in making value-added products."

Meanwhile, the Indian stock markets are seemingly oblivious to the India-China tensions. At 10,383 points, the Nifty 50 index is flirting with the highs seen so far in FY21. As a fund manager says, “The stock markets indicate that it’s difficult to boycott Chinese products, as it is tough to find a replacement." He added, “Remember how quickly the Chinese smartphone, OnePlus 8 Pro, got lapped up on Amazon India." In other words, investors are appearing to dismiss the boycott talk as rhetoric.

But the fact remains that there is actual disruption on the ground. According to reports, Maharashtra has put on hold three agreements signed with Chinese companies. Last week, a Bloomberg report, citing people with the knowledge of the matter, said, India plans to impose stringent quality control measures and higher tariffs on imports from China. DHL Express India Pvt. Ltd has said it has temporarily suspended pickup of import shipments from China, Hong Kong, and Macau for the next 10 days due to recent delays in their customs clearance.

Muthukrishnan of Elara says, “In all this, we forget that covid-19 pandemic is wreaking havoc in both countries. The economic growth can derail in the near term and much would depend how quickly the government and industry respond."

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