Top 5 manufacturing stocks to add to your watchlist

From initiatives like the National Manufacturing Policy, aiming to increase the share of manufacturing in GDP to 25% by 2025, to the PLI scheme for manufacturing, seeking to develop the core manufacturing sector at par with global manufacturing standards, the government has left no stone unturned.

Apart from this, the apparent global shift towards India will drive the sector to new highs.

For the past few decades, American and European companies have invested heavily in China, attracted by its low labour and production costs, and the considerable and growing size of its domestic consumer market. However, the tide is turning.

China still continues to be critical to global value chains, but companies are gradually diverting their focus towards countries like India. From textiles to consumer electronics, every industry is making a beeline to jump-start their operations in India.

The recent developments testify to the growing confidence in India as a manufacturing hub in Asia. These include Apple Inc’s decision to manufacture its iPhone 14 in India, Amazon’s decision to set up its first production line for its TV Firestick in India, and IKEA’s plans for a 48,000 square-metre shopping centre in the northern region.

VIP Industries, the largest luggage manufacturer in the country, is also gradually shifting its raw material sourcing from China to India, while ramping up its domestic manufacturing space.

All this, in tandem with the rising disposable income of a growing population and the rapid adoption of e-commerce, offers India a massive opportunity to become a leading manufacturing hub.

In this budding sector, top companies play a major role and are well-poised to touch new heights. And so with that in mind, we have shortlisted five such companies using Equitymaster’s Indian Stock Screener.

#1 RSWM

At the top of our list, we have RSWM.

RSWM is a textile player operating in three primary segments including yarn, denim, and knitted fabric.

The company caters to the domestic and international markets, with exports accounting for over 35% of the total revenues in the financial year 2022.

The company has grown its sales and net profits at a CAGR of 5% and 18.9% in the past five years.

While the stock price had performed well in the past few years, it has fallen in 2022, in line with peer companies and the overall market sentiment. After reaching its all-time of ₹346, the stock has fallen down to ₹154.

In the year gone by, the Indian cotton textile industry faced multiple challenges. The high price volatility and the higher absolute raw materials prices have dented the margins. The relative price differences compared to the international markets have led to a massive competitive disadvantage for most Indian textile companies.

Apart from this, a demand slowdown due to geopolitical tensions, strengthening of the dollar rate, delay in EU/UK FTA and inflation in European and US economies has dented the profitability further.

But now, cotton prices which peaked in Q2FY23, are stabilising on the onset of the new crop arrival. Companies expect a further correction in cotton prices, which can boost their margins. While demand may remain buoyant in the near term, the long-term prospects are strong.

A growing disposable income, ever-changing fashion trends and China plus one strategy serve as some major tailwinds for the industry. And RSWM is well-poised to benefit from this.

The company has invested around ₹4.1 billion (bn) in the expansion of denim, cotton mélange yarn, knits business, and modernisation and balancing equipment across all units. Apart from this, it plans to invest ₹3.1 bn to expand the spinning capacity in the financial year 2024.

The stock trades at a price to earnings ratio (PE) of 3.8 times, a discount of 52% to its 10-year median PE of 8 times.

#2 Trident

Next on our list is Trident.

Trident, a textile player, caters to three primary segments, including bed and bath linen (58% of total revenues in the December quarter ending 2023), yarn (29%), and paper (13%).

Over the years, the company has transformed itself from a yarn manufacturer to a vertically integrated home textile player. This transition has helped the company propel margins and generate demand for high-margin products.

While sales grew at a CAGR of 8.4% in the past five years, net profit grew by 9.3%.

The stock price from 2018-2022 followed the business's stellar performance, shooting up 10 times. But in 2022, things turned for the worse. The stock fell by 50% due to the poor performance.

The business was hit by rising input costs and poor demand, denting profitability. In the first nine months of financial year 2023, the company reported a drop in capacity utilisation and, consequently, sales and profits.

While this was an industry-wide issue, Trident underwent a change in guard during this time, adding insult to injury. Its founder and chairman stepped down as director and non-executive chairman, citing health issues and family obligations.

Despite the issues, the company is going ahead with its plans for capacity expansion. They plan to spend over ₹21.5 bn in 2023 alone, to be funded via a mix of debt and equity.

The stock trades at a PE of 33 times, a premium of 1.4 times to its 10-year median PE of 13.5 times.

#3 Dixon Technologies

Third on our list is Dixon Technologies.

Dixon is a multinational electronics manufacturing and services company. Its core competence lies in manufacturing consumer electronics used daily like televisions, washing machines, smartphones, LED bulbs, battens, downlighters, and CCTV security systems.

While the company hasn’t developed a brand of its own, it’s long-term contracts with some of the most well-recognised brands like; Samsung, Xiaomi, Panasonic, OnePlus, and Philips, give them an enviable edge.

Barring 2022, the stock price has remained on fire. From 2018-2022, the stock went up nine times. And the company's stellar performance is reflected in the parabolic movement of its stock price.

While revenues have gone up 3.5 times, the profits are up three times in the past five years. The RoE stands at 19.3% in the financial year 2022.

Despite expanding in a highly capital-intensive industry, Dixon Technologies has refrained from piling debt on its books. The debt to equity ratio in the financial year 2022 was 0.3 times.

The company reported weak numbers in the quarter ending December 2022 where sales fell 36% and profits were down by 34% in comparison to the previous quarter.

This was led by slower progress in the mobile market and a lackluster performance in the consumer electronics and lighting industries. The stock price, crashed by over 20% after the results were announced.

Another reason why Dixon Technologies share price fell was the weak revenue guidance by the management. They slashed the sales guidance to ₹127 bn for the financial year 2023 from ₹150 bn earlier. This change was due to weakness in the mobile segment and sluggish demand, in addition to falling realizations in other prominent divisions.

However, the company is adding new customers from the Middle East, making it the next leg of growth in business.

It also expects a sales recovery led by a ramp-up in production-linked incentives (PLI) with significant growth from new segments such as refrigerators, wearables, IT, etc.

#4 Bharat Forge

The flagship company of the Kalyani group, Bharat Forge is the largest forgings company.

Bharat Forge is a major supplier of critical forged and machined components to automakers and other industries such as aerospace, mining, oil and gas, marine, and power.

A big chunk of the company's revenues (59% in the financial year 2022) comes from exports. The company caters to North America (US and Mexico), South America (Brazil), Europe, and the Asia Pacific.

In the domestic auto market, they cater to commercial and utility vehicles, with major clients like Tata Motors and Ashok Leyland.

In the past five years, the company's revenue has grown at a CAGR of 9.7%, while profit has delivered a CAGR of 8.3% for the same period.

The company has grown well in the past, but it’s next leg of growth is to come from its defence segment. While still small, the company has big plans for the defence sector. They plan to expand their defence offerings to benefit from the government's push towards indigenous procurement of defense equipment.

In November 2022, its subsidiary, Kalyani Strategic Systems, won an export order worth US$155.5 million (m) for the export of artillery gun systems. With significant additions to its order book and a healthy execution rate, the company is convinced of this new era of strong growth.

#5 Gokaldas Exports

Last on our list is Gokaldas Exports.

Gokaldas is a leading readymade garment manufacturer and exporter. Exports contribute to over 89% of the total revenues, with the US accounting for over 80% of the total revenues.

The company's long-term contracts with some of the major global brands have contributed to its business growth. The sales have grown at a CAGR of 13.8% in the past five years and the net losses have turned into net profits.

Unlike other textile players, Gokaldas could pass on the rising raw material prices to the end consumer in 2023. This is because the company exports ready-made garments.

While most players reported a substantial drop in sales and profits in their latest quarterly results, Gokaldas stood out and reported a minor drop of 1% in sales and 12% in profits. This speaks volumes of the company's ability to manoeuvre the business in tough times.

Unlike its peers, the stock hasn't fallen much, down just 16% from its 2022 peak of ₹488. The stock trades at a PE multiple of 13.6 times, a discount of 17% to its 10-year median of 16.4 times.

Snapshot of best manufacturing stocks in India from Equitymaster's stock screener

Here's a quick view of the above manufacturing companies based on crucial financials.

Please note that these parameters can be changed according to your selection criteria.

This will help you identify and eliminate stocks that are not meeting your requirements and emphasise those stocks that are well inside the metrics.

So there you go…these manufacturing stocks can create wealth from India's upcoming capex manufacturing cycle.

Happy Investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com