Weekly Musings – NFO Pick (HDFC Transportation and Logistics Fund)

31 Jul 2023 , 09:49 AM

In our NFO Pick section, this week we have picked a thematic fund (HDFC Transportation and Logistics Fund). The fund hopes to tap stocks across the transport and logistics spectrum and that would include stocks from automotive, shipping & ports, ecommerce, rail/road/cargo, airports, airlines, railways, supply chain as well as warehousing. The fund will invest in all these themes as well as in businesses that are supportive of these core logistics and transportation verticals.

WHY HAS HDFC CHOSED TRANSPORT AND LOGISTICS FUND

The biggest justification for launching this fund is that it is  not just a sector but a theme; and in fact, it is several themes within a broad theme. There are some unique features of a transport and logistics fund in India.

• Many of the sub-themes tend to following varying cycles and hence the typical cyclical risk that you have in sectoral and thematic funds is largely reduced. For instance, airports, ecommerce, and warehousing are largely disconnected and operate on their own unique cycles of ups and downs.

   

• The customer base is extremely wide and varied for this theme. The theme caters to individuals (airlines & automotive) and also to corporates (shipping, ports, warehousing). Some themes like ecommerce can be both retail and corporate themes and this very rich mix of clients largely de-risks the business model.

   

• The businesses are a combination of asset light and asset heavy themes as also it can be a combination of mature businesses and start-ups. For instance, airlines and ports can be asset heavy while warehousing can be asset light. Similarly, ports and autos tend to mature businesses while EVs and logistics can also be largely start-up styled businesses.

   

• The theme of transport and logistics is also a mix of old school and disruptive and innovative technologies. For instance, there is the scope to make old style businesses in this vertical more efficient and effective by using modern technology and more advanced methods like AI and ML. That is the big opportunity. 

   

• The transport and vertical space offer tremendous flexibility in terms of business models. There are technically popular models like BOT, BOOT, BOLT etc. In addition, there is flexibility on branding, monetizing assets, contract manufacturing, outsourcing etc. Businesses are able to tweak risk-reward according to their choice.

   

• Finally, the transport and logistics business also offer a very wide geographical diversify. You have businesses that are focused on rural or on urban. Also, there is a choice between agri focused businesses versus manufacturing focused businesses. This entire game of transport and logistics is about efficiency and optimization.

To sum it up, transport and logistics is a huge potential area and the high logistic costs in India are offering a low hanging fruit for investors.

KEY PILLARS FOR TRANSPORT AND LOGISTICS THEME

There are 6 specific pillars of this transport and logistics fund and why this theme could take off. It is not just the broad logic, but the triggers that matter. Here are the triggers.

• There are the supportive tailwinds of expanding mobility in multiple ways. Rising per capita income, a young population and low domestic penetration is a classic setting for transport and logistics to grow. 

   

• People are not just ambitious about buying things but they also want to upgrade their purchases. This is typical when per capita income rising rapidly. Consumers are giving more importance to experience over cost and that supports premiumization.

   

• The Indian government has shown a sharp commitment to making the Indian economy net-zero by 2070. That may be a long way off, but the milestones are fairly clear. This is likely to put focus on decarbonization of rail, road travel in particular.

   

• The production linked incentive (PLI) scheme is a great boost for manufacture of automobiles in India. Government outlay for PLI is Rs45,000 crore and growing. Also, automotive alone accounts for 49% of manufacturing GDP in India.

   

• Exports is the big opportunity and the government is leaving no stone unturned. Export of 2-wheelers and tractors is already robust and government plans to grow vehicle exports by 5 times between 2016 and 2026, while components will grow 7.5 times.

   

• Finally, there is the mega infrastructure push by the Indian government, both hard and soft. There is massive expansion of roadways, railways, and airport infrastructure. Also, it is the intent of the government to cut logistics costs from 14% to under 10%.

In short, the government is taking major steps to make Indian industry and the Indian economy competitive and most of these steps have positive rings for transport and logistics.

WHY THE FACE OF LOGISTICS IS SET TO CHANGE

We have already seen the big themes and triggers for transport and logistics. The real question is how can the logistics business in particular make a difference to the HDFC Transportation and Logistics Fund in terms of identifying opportunities. While the government is serious about cutting logistics costs, there are 3 themes at play. 

1. The first theme is logistics shifting from the unorganized sector to the organized sector. The size of the logistics segment in India is slated to become Rs27 trillion by the year 2026. Out of this, India has just 1.5% of logistics players in organized segment compared to 10% in China and 15% in the US. Organized have the size, funding, and the access to data to grow much faster, and that is where the first opportunity lies.

    

2. Growth in GDP is one part of the story, but growth in ecommerce is going to call for high level logistics management. We are not just talking about ecommerce but everything from hyper delivery to cloud kitchens.

    

3. Government is extremely focused on giving a multi-pronged push to the logistics initiative in India. Government targets to bring down logistics cost to below 10% by 2030 and position India among top 25 countries in terms of the Logistics Performance Index. The real trigger could be a government supported data based decision support system.

    

HDFC TRANSPORT AND LOGISTICS FUND PORTFOLIO THEMES

The HDFC Transportation and Logistics Fund will be an equity oriented that will be predominantly invested in stocks in the transport, logistics and ancillary sectors. Here is how the portfolio is proposed to be structured.

• The core portfolio representing nearly 80% of the portfolio corpus of the HDFC Transportation and Logistics Fund will be invested in the transport and logistics sector across a sectoral mix of passenger cars, utility vehicles, 2 wheelers, tractors, auto components, logistics solutions providers etc.

   

• Apart from the core portfolio, the balance will be a flexi strategy where it will take a wider look across the various market cap segments relevant to the transport and logistics theme. It will focus on the stocks in the Nifty Transport and Logistics Index and largely adopt a sector agnostic approach with a bottom-up bias.

   

• In terms of company stock selection, the focus would be on market leaders or companies with the potential to become leaders. Respective segment would be defined in  a granular fashion. Secondly, the theme of focus would also be stocks that have the potential to benefit from the evolving landscape in transportation and logistics theme.

However, it must be noted that this would be a high risk strategy as it will combine the equity risk plus a sectoral / thematic risk in its portfolio.

 

TRANSPORT AND LOGISTICS THEME: SIZE AND ATTRACTIVENESS

As of now, the theme may be predominantly focused on automobiles, but this theme is expected to expand gradually over time. If you look at the market cap of the stocks available under this theme, it is close to Rs27.21 trillion. That is a fairly large opportunity. More importantly, the overlap with the Nifty is just 6.6%, so it would offer a natural diversification compared to the index stocks. The specific opportunity matrix also offers a healthy mix of large caps, mid-caps, and small caps. Secondly, the universe of companies meeting the criteria, as identified by the fund is about 134 in numbers, which is fairly comfortable. Nearly 100 out of the 134 companies pertain to autos and auto components.

Thirdly, if you look at the 12-month forward P/E of the transport and logistics index on the NSE, it is trading at 30X, which is the historical median level. However, it must be noted that this P/E ratio is supported by return on equity (ROE) of around 16%, which is quite healthy. How about returns? If you look at the annual returns of the Nifty Transport & Logistics Index and compare with the Nifty 500 TRI, in more than 75% of the cases, the transport and logistics has beaten the broad index. More specifically, if you focus on the CAGR returns over different time periods from 1 year to 18 years, then the transport and logistics index has beaten the Nifty 500 on almost all occasions.

There is one more way to look at this theme. If you look at the 5-year rolling returns of the Nifty Transport and Logistics Index, it has given more than 15% returns in 55% of the cases while it is just 30% for the Nifty 500 index. You almost get the same results even if you consider 3 year rolling returns.,

GLANCE AT THE HDFC TRANSPORTATION AND LOGISTICS FUND NFO

Here are some details of the HDFC Transportation and Logistics Fund NFO you must be aware of before you decided on investing in the fund.

1. The fund opens for subscription on July 28, 2023 and the NFO subscription will close on August 11, 2023. It is an open ended fund that offers continuous purchase and redemption available at NAV linked prices.

    

2. Entry loads do not exist in India, but if the fund is redeemed or switched within 365 days from the date of allotment, then there will be an exit load of 1% imposed. There is no exit load levied after holding for 365 days.

    

3. The minimum investment in the HDFC Transportation and Logistics Fund NFO will be Rs100, in the NFO and in continuous purchases, and in multiples of thereafter. The fund ranks high on the SEBI Riskometer risk-scale.

    

4. The fund offers Regular and Direct plans for the investors. In addition, investors can either choose the Growth option or the IDCW (income distribution cum capital withdrawal) option, based on what suits their needs.  

    

5. How will the fund be benchmarked? It will be benchmarked Nifty Transportation & Logistics TRI Index. Priya Ranjan will be the fund managers for the HDFC Transportation and Logistics Fund.

The HDFC Transportation and Logistics Fund NFO is an opportunity for investors to invest in a rather unique and futuristic theme in the Indian context. It can be effective over the long run as the in-built diversification and the alpha generating abilities of the theme can result in better risk-adjusted returns. Investors in the NFO should be prepared for a longer term perspective of 5-7 years for full benefits of such a complex theme to be fully realized.