Weekly Musings – NFO Pick (Kotak Nifty India Tourism Index Fund)

9 Sep 2024 , 01:41 PM

WHAT IS DRIVING THE TOURISM BOOM IN INDIA

In the last few years, there has been a visible surge in tourism in India and there are several reasons for the same. Here are 5 triggers that have been responsible for the surge in tourism in India.

• The first factor is the rapidly growing middle class in India and the sharp spike in their affordability index. The Indian middle class is expected to grow by over 60% by the year 2046. In fact, disposable incomes have grown by nearly 36% in the last 3 years and that is translating into a lot of foreign and domestic travel.
• The second factor is the rapid developments in infrastructure in India and the positioning of select destinations as tourism centres. The government has already opened 400 new routes, added about 35,000 KM of highways, and added more than 3,000 new railway tracks. All these have given infrastructure a big boost.
• The rapid growth of digitization has brought about a revolution in the tourism industry in India. For example, the online travel market is projected to touch $28 billion by the year 2029 and today more than 40% of the hotel bookings and a much bigger share of airline bookings are being done online. It has cut costs and increased productivity.
• Ironically, the lockdown acted as a catalyst for tourism in two ways. Firstly, the work-from-home (WFH) promised more leisure time for people and some of that translated into quality vacations with the family. At the same time, COVID taught people that life was uncertain pulling them more towards quality family time.
• Above all, the rise of the Gen-X and Gen-Z millennials has also resulted in rising demand for tourism and tourism related services. Most of these Gen-Z persons are avid travellers and prefer to explore new avenues. They also prefer to spend more on travel rather than on goods. This has led to a surge in domestic and international travel, with a focus on exotic destinations.

Within the overall tourism basket, several sub-sectors are emerging. Pilgrimage tourism is estimated at $59 billion by the year 2028, medical tourism is expected to see 7.3 million tourists visiting India in 2024 alone. In addition, business travel is projected at $76 billion by the year 2032, while, adventure tourism is just about taking off at $2 billion.

UNDERSTANDING THE TOURISM ECOSYSTEM IN INDIA

The tourism ecosystem in India is best captured by the Nifty Tourism Index, which is broken up into 5 buckets of companies.

• The first bucket refers to the companies that help you plan your travel and stay. In the listed space, these companies include names like Easy Trip, IRCTC, BLS International, Thomas Cook etc.
• The second bucket refers to the companies that help in the preparation and packing ahead of the travel in the most effective and efficient manner. This includes companies like VIP Industries, Safari Industries, etc.
• The third refers to the companies that allow you to embark on your travel plans and essentially include the airlines and the private airport owners. This list includes names like Interglobe Aviation (Indigo Airlines) and GMR Airports Infrastructure, among others.
• The fourth category refers to the companies that manage your stay during the course of your vacation. This would include listed hotel names like Indian Hotels (Taj group), Chalet Hotels, Lemon Tree Hotels, Mahindra Holidays & Resorts etc. This is where the tourists prefer to relax during their vacations.
• Lastly, there are the food joints because your holiday is incomplete without good food. This bucket includes companies like Jubilant Foodworks, Devyani International, Sapphire Foods, Westlife Foods, RBA etc.

It is this combination of Plan, Pack, Embark, Relax, and Enjoy features that constitute the India tourism, giving a 360-degree participation in the India tourism story.

QUICK TAKE ON THE NIFTY INDIA TOURISM INDEX

The tourism index is drawn from the Nifty 500 stocks which meet the above five characteristics of the tourism story. Here is the list of the 17 stocks that constitute the Nifty India tourism index.

Company Name	Symbol	ISIN Code
BLS International Services	BLS	INE153T01027
Chalet Hotels Ltd.	CHALET	INE427F01016
Devyani International Ltd.	DEVYANI	INE872J01023
EIH Ltd.	EIHOTEL	INE230A01023
Easy Trip Planners Ltd.	EASEMYTRIP	INE07O001026
GMR Airports Infrastructure	GMRINFRA	INE776C01039
Indian Hotels Co. Ltd.	INDHOTEL	INE053A01029
IRCTC Ltd	IRCTC	INE335Y01020
Interglobe Aviation Ltd.	INDIGO	INE646L01027
Jubilant Foodworks Ltd.	JUBLFOOD	INE797F01020
Lemon Tree Hotels Ltd.	LEMONTREE	INE970X01018
Mahindra Holidays & Resorts	MHRIL	INE998I01010
Restaurant Brands Asia Ltd.	RBA	INE07T201019
Safari Industries (India) Ltd.	SAFARI	INE429E01023
Sapphire Foods India Ltd.	SAPPHIRE	INE806T01012
V.I.P. Industries Ltd.	VIPIND	INE054A01027
Westlife Foodworld Ltd.	WESTLIFE	INE274F01020

Data Source: NSE

Out of the above list, there are 5 stocks that combined account for 74.8% of the total weight of the Tourism index. The 5 stocks with their respective weightages include Interglobe Aviation (21.23%), Indian Hotels (18.27%), GMR Airports Infrastructure (13.74%), IRCTC Ltd (11.48%), and Jubilant Foodworks (10.08%).

Here are some key facts about the index that you need to know.

• It is a periodic capped free float index. While the index was launched only on June 18, 2024, its base date has been set at April 01, 2005, with a base value of 1,000. All index value of the Tourism Index are with reference to this particular base. The index can have a maximum of 30 stocks and maximum capping weight is 20%.
• The index value will be calculated at the end of the day on all trading days. The review of the index components will be done on a semi-annual basis in March and September. The rebalancing of the index will be done quarterly in March, June, September, and December of each year.
• In terms of sectoral representation, the index has 61.76% in consumer services, 34.97% in other services, and the balance 3.27% in consumer durables. These can be further broken up into the five thematic buckets within the ambit of tourism that we have already discussed about.
• Let us talk about back-tested returns on the Tourism Index. In terms of TRI, the index has earned 42.75% over the last one year and 25.19% on a CAGR basis in the last 5 years. However, if you look at the CAGR returns since inception, it comes to about 12.6%. Clearly, most of the returns on the index have only come in the last few years.
• How does the index measure up in terms of risk? The standard deviation over a 5 year period has been about 24.82%, which shows a fairly high volatility risk, although returns have also been robust. The beta of the fund has hovered between 0.9 and 1.0, making it almost at par with the index. The correlation coefficient at around 0.7X also makes this a good instrument for diversification of the portfolio.

The tourism index is a high risk-high return venture for investors, but over the long term it has the potential to outperform the market indices.

GLANCE AT THE KOTAK NIFTY INDIA TOURISM INDEX FUND NFO

Here are some details of the Kotak Nifty India Tourism Index Fund NFO you must know to decide on investing in the fund.

• The NFO of Kotak Nifty India Tourism Index Fund opens for subscription on September 02, 2024 and will close on September 16, 2024. Being an open-ended passive thematic index fund, it will reopen for sale and repurchase anywhere between 3 days and 15 days of NFO closure. The Kotak Nifty India Tourism Index Fund is best suited to investors looking for long term outperformance with a focused exposure to the tourism sector, which could be companies that directly participate in tourism activity or are enablers.
• The core focus of the Kotak Nifty India Tourism Index Fund, being a passive index fund, is to mirror the Nifty India Tourism Index in TRI (total returns index) terms. The fund will invest in the components of the Nifty India Tourism Index in the same proportions and look to minimize the tracking error in the process. The focus will be on long-term capital appreciation, through a passive approach to invest in the thematic tourism index. A holding period of 5-7 years at the very least is suggested to realize full benefits.
• On the Standard SEBI Risk-O-Meter, the Kotak Nifty India Tourism Index Fund will be ranked as a Very High Risk Fund. The high risk is an outcome of the predominant exposure to equities (80% to 100%) that the Kotak Nifty India Tourism Index Fund will have. In addition, there is the risk of entering into the markets at lifetime highs as well as the risk of focusing the entire portfolio on the tourism theme. Being an index fund, the risk of tracking error is also there.
• The Kotak Nifty India Tourism Index Fund is about generating long term capital growth through a passive approach to tourism stocks. It will focus on a number of sub-themes like airlines, hospitality, restaurants, travel, and tourism services etc. While allocation will be in the same proportion as the index components, some variations are likely due to factors like liquidity maintenance, quarterly rebalancing gaps etc. The fund will offer growth option and the IDCW option to investors.
• Investors can invest in the NFO of Kotak Nifty India Tourism Index Fund in minimum size of ₹100 lumpsum and in multiples of ₹1 thereof. This also applies to additional purchases and switch-ins. The fund also supports the systematic investment plans (SIPs), systematic withdrawal plans (SWP), and the systematic transfer plans (STPs) programs on a structured and long term basis. The SIP investments would also have a minimum tranche limit of ₹100 per tranche.
• There is no entry load, and, being an index fund, there is also no exit load on the fund. Normally, the exit loads are levied to protect the interests of continuing investors in the fund by active funds. However, even in the absence of exit loads, it is recommended that investors should ideally look at a holding period of 5-7 years to realize the full potential of this fund and manage to traverse the cycles.
• Despite being an index fund, the Kotak Nifty India Tourism Index Fund does not give any guarantee on returns and the performance of the fund is subject to the vagaries of the markets in general and the performance of the tourism sector in particular. The Kotak Nifty India Tourism Index Fund will be benchmarked to the Nifty India Tourism TRI, which the fund managers will seek to mirror by minimizing the tracking error. There is a possibility that the fund may not be able to precisely mirror underlying Tourism index.
• The Kotak Nifty India Tourism Index Fund will be managed by Devender Singhal, Satish Dondapati, and Abhishek Bisen. The intent of the fund management team will be to mirror the Nifty India Tourism Index TRI by minimizing the tracking error to the extent possible. Computer Age Management Services (CAMS) will be the registrars to the fund.

The Kotak Nifty India Tourism Index Fund NFO offers an opportunity for investors to participate in the upside opportunity of tourism stocks in India, amidst the rising interest in India and the rising purchasing power of Indian consumers.

TAX TREATMENT FOR KOTAK NIFTY INDIA TOURISM INDEX FUND

Kotak Nifty India Tourism Index Fund will be classified as an equity fund for tax purposes. The tax provisions below are pursuant to the changes made in the full Union Budget presented on July 23, 2024.

• Dividends declared (if any) by the fund will be taxed at the peak rate of tax applicable. In addition, if the overall dividends exceed ₹5,000 in a year, they will be subject to tax deduction at source (TDS) at the extant TDS rates.
• Time frame for classification as long term capital gains (LTCG) will remain 1 year for the Kotak Nifty India Tourism Index Fund. STCG (held for less than 1 year) will be taxed at 20% on gains plus cess at 4%, making effective STCG rate 20.80%.
• The LTCG on the fund (1 year holding and above) will be taxed at a flat rate of 12.5%. However, threshold exemption limit has been increased from ₹1 Lakh to ₹1.25 Lakhs. In this case, the actual tax impact will be 13% after including 4% cess.

It is what you earn from the Kotak Nifty India Tourism Index Fund in post-tax terms that matters. That is why, it is essential to understand tax implications.