Why this fund manager is bullish on the manufacturing theme

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At a time when the headline indices look range-bound, R. Sivakumar, chief investment officer of Axis Mutual Fund, sees pockets of opportunities across large-, mid- and small-caps. He believes growth is showing signs of revival. He points to manufacturing and the revival of the private capex cycle as a theme that can play out over the next few years. Edited excerpts:

Let me start with caution. IT rallies reflexively whenever global semiconductors sell off, on the same AI/anti-AI trade, but that isn't a reason to own it, because quarter-on-quarter growth momentum still hasn't returned. The AI-deployment piece is growing fast, but it's a small slice of revenue; the bulk is legacy software development, which is deflating. Consumer staples remain weak, though turning slightly. And in pockets that have run very hard—power, auto ancillaries, defence, electronics manufacturing—be selective. Power is the clearest example: prices now bake in billions of dollars of data-centre orders that haven't arrived, and companies that can't meet those expectations are being de-rated quickly. We like power as a long-term cyclical theme, but at today's prices, you have to question it.

Manufacturing , especially exports, and especially in mid- and small-caps. India accounts for under 2% of global manufactured goods exports, so there is a lot of room for growth. Rupee depreciation bodes well for exporters, and the new free trade agreements (FTAs) with the European Union and the UK bring us to tariff parity with the likes of Vietnam and Bangladesh. Second: domestic private capex has finally turned. Aggregate capex looks slow only because infra is soft; strip that out, and private capex appears to have improved. Beyond that, auto ancillaries are a strong theme as the ICE-to-EV shift reconfigures global supply chains, alongside policy-driven areas like semiconductors and electronics manufacturing services under the production-linked incentive schemes, and defence.

Yes. India's valuation premium to the world is now essentially zero, which is astonishing given we've almost always traded at a premium. It is less about India becoming cheaper and more about other global markets becoming more expensive. Large-caps are trading more than one standard deviation below their long-term averages, so you're paying relatively less to be in the market—relatively cheap, I'd stress, not absolutely cheap. And the laggards are turning: banks are the clearest case. System credit growth has gone from around 10% a year ago to 16-18%, asset quality is clean, and margins just need the rate hikes the Reserve Bank of India is signalling.

They look expensive on a standalone P/E basis, but that’s where the growth is. When Nifty earnings were growing around 8%, mid- and small-caps were compounding 15%-plus, and that's accelerating even as Nifty-level earnings are picking up. A stock at 30-40 times on 30% earnings growth looks very reasonable a year or two out. So, the real question isn't the multiple; it's whether the growth is real.