‘Transportation and Logistics Fund will try to reduce the cyclicality of the auto sector’

Take us through building your transportation and logistics fund. Which sub-sectors will you focus on and how many stocks will you have in the fund?

The fund will invest in auto original equipment manufacturers (OEMs), auto ancillary and logistics companies. Within the theme, we have identified over 100 trusted companies including passenger vehicle, two wheeler and three wheeler, commercial vehicle, port, shipping, rail transport, road transport, warehousing, e-commerce and food delivery sectors. There are around 31 stocks in the Nifty Transportation and Logistics Benchmark Index. Our fund is likely to have 40-50 stocks that will seek higher indexation in the auto ancillary, logistics and mid- and small-cap space as compared to the benchmark.

Automobiles and auto components have a weightage of 74% in the fund’s benchmark (Nifty Transportation and Logistics Index). Will it auto become a proxy for the theme?

Our fund will undoubtedly serve as a good proxy for auto themes. However, by identifying structural considerations in the logistics sector, we will try to reduce the cyclicality of the auto sector in our funds. In an effort to reduce the cyclicality of the portfolio, we will make judicious use of the 20% fund limit, which can be invested in a discipline other than Auto and Logistics.

Why are mutual fund houses focusing on the theme of transportation and logistics?

Themes include companies with strong growth prospects, longevity, anti-fragility, and good return on invested capital (ROIC) over cycles. The sector’s volume growth in the last 10 years has been subdued due to various macro or micro headwinds. As the headwinds recede, the theme appears ripe for outperformance.

What are the tailwinds for this topic?

Over the next three-five years, the auto and logistics sectors are likely to experience tailwinds, which include improving volume growth, better price growth led by higher premiums and better margins with easing of commodity headwinds. Also, Indian companies are increasing their share in the global export market and this trend is likely to continue. These tailwinds will likely ensure a healthy outlook for earnings growth, which, ceteris paribus, should ideally be reflected in the stock price over the medium term.

Any headwinds for this topic?

In the near future, the space is facing adverse conditions from rising interest rates and a slowing global economy that will impact export demand. Nevertheless, some of these adverse conditions appear to be temporary and are unlikely to impact Theme’s medium-term earnings outlook.

The discipline of Transport and Logistics has seen steady growth over several periods including the last five years. Why does this theme go through a period of poor performance, and why do you think this theme is set for a revival?

There have been five significant disruptions in the last six years, beginning with the GST implementation, followed by the IL&FS crisis, demonetisation, Covid-19 and the Russia-Ukraine crisis. Additionally, the sector witnessed several regulatory changes, such as change from BS-IV to BS-VI, changes in safety norms, hike in insurance premium, etc., leading to an increase in the cost of vehicle purchase. The above disruptions affected affordability and led to component shortages as well as demand or supply constraints. Accordingly, the sector’s volume growth and margins were weak, which had a negative impact on earnings and stock price performance. The good news is that these adverse conditions seem to be gradually easing, indicating a healthy earnings growth outlook over the next three-five years.