Launches in the sectoral/thematic category of funds usually come up when a theme is hot. For long, UTI Transportation and Logistics (T&L) was the only active fund focused on auto and allied sectors. But at least four more (from Aditya Birla Sun Life, ICICI Pru, HDFC and Bandhan MFs) came up in quick succession in the last two years, coinciding with the upturn in auto sales following the Covid slump. So far, in 2024 and in the previous two calendar years (2022 and 2023), the Nifty T&L TRI (Total Returns Index) has outperformed the Nifty and Nifty 500 by 6 to 26 percentage points. Given the tailwinds seen so far, Kotak T&L is trying to hop on to this bandwagon and strike when the iron is hot. The NFO is open till December 9.
Drivers and stock selection
Bettering road infrastructure, scope for greater penetration given the population size, and increasing affordability aiding in premiumisation are long-term drivers for auto stocks. Along with this, the push for electric vehicles and the need to develop the surrounding eco-system are creating a new set of opportunities for investors. The government’s efforts to aid faster movement of goods and lower the cost of transport through the setting up of dedicated freight corridors, multi modal logistics parks, initiatives such as GATI Shakti, Bharatmala and Sagarmala and so forth, provide runway for growth in the logistics space. The rise of e-commerce provides offers good scope too. The fund will be a ride on all these structural drivers.
The Nifty T&L index is the benchmark for the fund. No prizes for guessing the top holdings in the index: listed large-cap auto manufacturers Mahindra & Mahindra (14.5 per cent), Tata Motors (10.5 per cent), Maruti Suzuki (8.7 per cent) and Bajaj Auto (6.5 per cent). On the logistics side, Zomato (8.9 per cent) and Adani Ports (6 per cent) are the top weights in the index. Considering that this is an active fund, with limited large-cap stocks both in the auto and in the logistics space, the theme itself makes it lean towards mid and small-cap stocks. As per the NFO presentation, the stock universe for the theme consists of only 10 large-caps but 26 mid-cap and 278 small-cap stocks. All existing T&L funds hold between 60-74 per cent in auto and auto ancillary stocks making the theme more dependent on the fortunes of the auto sector. Given the narrower pool of stocks in logistics, the holding pattern of the Kotak fund could be no different.
Cyclical play
Looking through the rear-view mirror, domestic auto sales have been on a purple patch in the last 2-3 fiscals. But the cyclical nature of the industry is beginning to show up. In the current fiscal, only two-wheelers sales, which picked up late, continues to grow in double-digits year-on-year. Passenger vehicle sales growth is at best flat, while commercial vehicle sales are already showing a contraction. This is reflecting in the stock movements in these segments. From the September-end market peak until now, while bellwether Nifty has lost about 7-8 per cent, the fall in the Nifty T&L and the Nifty Auto indices is nearly double that. Frontline auto stocks such as Tata Motors, Maruti Suzuki, Bajaj Auto, Hero MotoCorp and TVS are down 18-32 per cent from their respective peaks. Having come up only during the post-Covid upcycle, the relatively newer funds are showing good one-year returns at 30-40 per cent. However, a closer look at UTI T&L fund which has a track record of more than 10 years shows that during bad years for the auto sales (2018- 2021 being examples), the fund has done worse than the broader markets represented by the BSE 500 (data from Value Research). Existing funds too are playing their cards carefully. The UTI fund holds only 64 per cent in the auto and auto components space in its latest October portfolio, compared to 80 per cent a year ago. The HDFC fund has steadily trimmed it to 69 per cent now from 77 per cent in April 2024 and the ABSL fund, to 60 per cent from 68 per cent in June 2024.
As always, timing the entry and exit is key in sectoral/thematic funds. Those buying now must be prepared to go through the cyclical downturn before the upturn begins.
