Weekly Musings – NFO Pick (HSBC Consumption Fund)

7 Aug 2023 , 09:13 AM

In our NFO Pick section, this week we have again picked a thematic fund (HSBC Consumption Fund). Consumption is not just a sector but a much broader theme. There can be consumption theme in FMCG, autos, consumer durables, telecom and in digital. From an Indian market standpoint, consumption theme is dominated by 4 key sectoral sub-themes. FMCG, automobiles, consumer durables and telecom/digital jointly account for nearly 84% of the overall consumption theme in India. There are also other sectoral themes under consumption like retailing, domestic power, realty, textiles etc, but these are relatively small in comparison to the big-4 themes of consumption.

THREE THEMES ON WHICH HSBC CONSUMPTION FUND IS BASED

The HSBC Consumption Fund will have an 80% exposure to the consumption theme with the fund manager having the discretion of allocating the balance 20% outside of consumption. However, it would be the consumption theme that would predominate the risk and returns of the HSBC Consumption Fund. Here are 3 themes for the Consumption Fund.

• The first theme is the core theme of consumption. The HSBC Consumption Fund is based is that as India grows and the purchasing power expand, consumption becomes the real engine of long term growth in the economy. The HSBC Consumption Fund portfolio will be actively managed with the companies directly being consumption companies or deriving benefits from consumption as a theme.

   

• The second theme on which the HSBC Consumption Fund is based is, High Growth. There are several factors that are driving high growth in this sector. The spread of digital technologies has made market seamless and improved penetration for most consumption driven companies. This sector has also benefited substantially from the underlying shift happening from the unorganized sector to the organized formal sector.

   

• The third important theme of the HSBC Consumption Fund is Consistency. Most of the high quality consumption stories, be it in FMCG, automobiles or even telecom; have delivered above average growth on a consistent basis. That also explains why the consumption story tends to trade at a higher P/E valuation. The consistency also stems from the fact that the business models of this theme are not too cyclical.

To sum it up, consumption theme is the low-hanging fruit as India prepares for a big leap in overall GDP to $5 trillion and in per capital income to around $4,000 per year.

INDIA IN 2023 IS WHERE CHINA WAS IN 2006

In terms of the sweet spot that India finds itself in economically, India is almost at the same spot where China was in 2006. If you thing that is a generalization, just look at the numbers.

• In 2009, China opened its first Apple store and did sales of $3.3 billion. By FY22 it had grown to $74 billion, a CAGR growth of 27.3% over the next 14 years. Apple sold phones worth $4 billion in FY22, so one can extrapolate where India could reach by FY36.

   

• Let us turn to per capita GDP. In the year 2000, China had a per capita income of $2,000. In the next 10 years to 2016, the per capita income of China had growth 14.5% CAGR. India was at per capita GDP of $2000 in FY19, so one can extrapolate the next 10 years.

   

• Between 2006 and 2023, China car sales grew nearly 5-fold from 5 million to 24 million units. In FY23, India reported car sales of 4 million, which is roughly where China was in 2006, so the extrapolation can show us the growth path from here.

   

• Between 2006 and 2023, China air passengers grew 3 fold from 158 million to 488 million per annum. As of FY23, India’s air passenger traffic stands at 164 million, once again a case of being poised exactly where China was in the year 2006.

   

• India is also in the same position as China in 2006 in terms of food and beverages consumption, medicines consumption, as well as the consumption of medical equipment and sports equipment. Between 2006 and 2023, China saw growth of 3.6X in food & beverages, 3.5X in medicines and 7.4X in sports equipment.

The moral of the story is that India is poised to replicate the Chinese miracle between 2006 and 2023, starting this year onwards. India has the advantage of positive demographics with the highest proportion of young population. Nearly 34 million households are expected to enter the category of aspiring consumers by 2030 while about 43 million households are likely to enter the affluent and elite categories. The kind of consumption shifts that it will generate in the Indian economy and its GDP growth promises to be humongous.

HOW THE PICTURE OF HOUSEHOLD SPENDS IS CHANGING

One of the underlying themes of the Consumption Play is that the picture of household spending in India is changing rapidly. A quick comparison of the household spending pattern in 1992 versus 2022 gives an idea of the shifts that have taken place. 

1. In 1992, financial services and insurance accounted for just 2% of the household budget, which has grown to over 5% in 2022. There is a lot more focus on financial planning and people are starting to realize the importance of savings and risk management.

    

2. The biggest shift has been in discretionary goods, which has grown from 9% of the household budget to 16% of the household budget between 1992 and 2022. People are spending less of the budget on basic essentials (which has fallen from 57% of the household budget to 40% in the last 30 years). This is an indication of greater demand for brands, greater premiumization of products and more willingness to spending on goods and services that are not strictly classified as necessities.

    

3. Health and medical spending have gone up from 2% to 5% of the household budget. It is not just that costs have risen, but people are actually investing in their health. This high level of health consciousness is also bringing about a major shift in consumption patterns.

    

4. Finally spending on transport has gone up from 10% to 15% and that can be largely explained by the surge in spending on owning and using cars. This also means the start of a huge demand for EVs, which is already evident now.

All these trends are likely to be supported by some very interesting numbers. For instance, between 2021 and 2031, the per capita income is expected to rise from $2,278 to $5,242, while the rural to urban income gap will reduce from the current 1.8X to 1.4X by 2031. The internet penetration has risen from 8% to 47% in the last 10 years, and is expected to surge further to 65% by 2031. In terms of organized market share, paints are already 70% while food services are 33%. This will increase further by 2031. The median age of the population will just go up by 2 years in the next 10 years while the internet penetration will surge from 41% to 70% by 2031. That is the promise of a humongous future for consumption theme.

 

PENETRATION, ORGANIZED SHIFT AND PREMIUMIZATION

The consumption theme for the HSBC Consumption Fund will be driven by 3 drivers viz. penetration, shift to organized segment and premiumization. All the 3 are likely to change the face of consumption from the stock market perspective. Here is why.

• A classic example of penetration is Asian Paints, which grew its sales from Rs1,196 crore in FY01 to Rs34,489 crore in FY23. The penetration improvement happened through wider dealer network, total home solutions, environment friendly products and reduction of repainting cycle, apart from product category expansion.

   

• A true example of shift to organized sector is Titan Company. Its revenues have grown from Rs708 crore in FY01 to Rs40,575 crore in FY23. In 2001, jewellery was 95% in the unorganized sector. With a vast network, standard business practices, ethical processes and demonetization took organized share to 33% in 2023. Titan was the big driver.

   

• The third theme is premiumization and a classic example is Page Industries. It moved the market from 1% premium in FY07 to 20% premium in FY23. Premiumization is visible in other sectors too like LED lighting, frost free refrigerators, split Air Conditioners, liquid detergents, 5G friendly mobile phones, air travel etc.

Going ahead, the fund will look for companies that tick the check boxes on one or more of the themes viz. penetration, premiumization and organized market shift.

 

CONSUMPTION THEME: IS THE MARKET LARGE AND LUCRATIVE?

Let us look at the investable universe first. In terms of addressable market cap, the total universe for consumption theme is large enough at Rs167 trillion. Out of this Rs130 trillion would be large cap segment, Rs25 trillion would be the mid-cap sector and the balance Rs12 trillion would be the small cap sector. There are a total of more than 250 companies that meet the consumption criteria, so the overall addressable is large enough for the fund managers to effectively tap the theme.

Let us look at the returns of the Nifty Consumption TRI index. Over a 3 year period, the Nifty Consumption Index has given 14% CAGR returns compared to just 12.7% for the Nifty. Over a 5 year period, Nifty Consumption Index has outperformed the Nifty Index by 100 bps on a CAGR returns basis at 13.3%. If you look at a slightly longer 10-year perspective, the Nifty Consumption Index has given 14.7% CAGR returns compared to 12.6% for Nifty. Clearly, the consumption theme has outperformed generic indices consistently over longer time frames.

Returns alone are not sufficient if they are generated with higher risk. So let us look at volatility as measured by standard deviation. The Nifty Consumption Index had an average volatility of 17% over the last 14 years compared to 18% for the NSE 500 and about 21% for other thematic indices. So, consumption theme has been generating higher CAGR returns with lower risk; effectively magnifying the risk-adjusted returns. That sets the tone to look at the nuances of the HSBC Consumption Fund.

GLANCE AT THE HSBC CONSUMPTION FUND

Here are some details of the HSBC Consumption Fund NFO that you must know before you decided on investing in the fund.

1. The fund opens for subscription on August 10, 2023 and the NFO subscription will close on August 24, 2023. It is an open ended fund that offers continuous purchase and redemption available at NAV linked prices, which will reopen on September 07, 2023.

    

2. Entry loads do not exist in India, but if the fund is redeemed or switched within 1 year from the date of allotment, then there will be an exit load of 1% imposed only on any redemption above 10% of the corpus. No exit load is levied if held for more than a year.

    

3. The minimum investment in the HSBC Consumption Fund NFO will be Rs5,000, in the NFO and in multiples of thereafter. The fund ranks high on the SEBI Riskometer risk-scale, being classified as a concentrated thematic fund.

    

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 India Consumption TRI Index. Gautam Bhupal and Sonal Gupta will be the fund managers for the HSBC Consumption Fund.

HSBC is turning aggressive on India after the acquisition of L&T Mutual Fund. Consumption theme is the theme for the future of India as it transforms from a $3.5 trillion economy to a $5 trillion economy. Consumption offers the best India proxy at this point of time.