Manufacturing funds offer broader exposure across various sectors, says Jitendra Sriram, Baroda BNP Paribas MF

The good part of manufacturing as you can see from its benchmarks is that it gravitates across myriad industries, said Jitendra Sriram, Senior Fund Manager, Baroda BNP Paribas Mutual Fund.

In an interview with MintGenie, Sriram said that manufacturing funds are not as narrow as certain thematic mutual funds as one has ample manoeuvring space reducing the risks.

Edited Excerpts:

Too many mutual fund houses are jumping in to launch their manufacturing funds. What, according to you, prompted them all of a sudden to focus on the manufacturing theme?

The emphasis that the government is lying to step up manufacturing is one of the major causes. Just as we saw India go through the green revolution in agriculture, the white revolution in dairy and later the services revolution in the late 90s, we seemed to have sidestepped manufacturing, and this is being rectified now with the government targeting manufacturing to reach 25% of GDP in 2047 from 17% currently. Even assuming a 6% growth of GDP, the manufacturing size can expand by more than six times from current levels.This is buoyed further by schemes like PLI and OSAT. In addition, we see global trends on near-shoring, climate change, industry 4.0 & digitisation prompting a revival globally.

What is the current contribution of the manufacturing sector to India’s GDP? How do you foresee its trajectory in the future?

We are assuming GDP to compound only at 6% and if we assume that we manage to expand manufacturing share only by 500 bps (17% to 22%), the market will likely be 5X of what it is currently. We believe if the government thrust remains intact this kind of growth in the manufacturing landscape is feasible.

The incumbent government has returned to power. Do you view this as a boost to the “Make in India” initiative?

Frankly, none of the political parties are anti-development. However, focus areas do change marginally. The good part of continuity is that there is no reset and restart in the overall thinking so it can build upon the policies and priorities decided over the last 10 years. To that extent, the baton passing is smooth and without hiccups.

What makes a manufacturing fund preferable for investors over other options like flexi cap or small-cap funds, despite offering similar advantages?

As we emphasise manufacturing from a strategic view, services share may come off from the current 54% which means the growth would be lesser than the GDP growth. As we are aware the benchmarks for most indices would have service sectors at about 50% which this fund would not have exposure to and hence may give superior alpha to unit holders.

To add, the global themes mentioned earlier also boost the export opportunity across areas such as autos, industrials, and pharma. We see increasing examples of multinational corporations using India as a sourcing centre.

Is this the right time to bet on manufacturing funds?

We have seen a large part of PLI, OSAT, and defence platform orders (under “Atmanirbhar Bharat”) being awarded in FY24 which gives an indication of the government walking the talk. One could argue that certain pockets, especially, in industrials have run up sharply but as mentioned earlier the theme isn’t narrow and we see enough options for creating a sound portfolio across sectors. As a result, we do believe that the time is apt to look at this theme in earnest.

The recently launched AMFI data saw more people investing money in thematic funds despite their inherent volatility. As a fund manager, do you support the idea of investing in thematic funds like the manufacturing fund?

It’s an interesting question. Any narrow subject does inherently have higher risk-return trade-offs. The good part of manufacturing as you can see from its benchmarks is that it gravitates across auto & auto ancillaries, industrials/capital goods, pharma, oil & gas, metals/mining & chemicals apart from some smaller sectors. So, it is not as narrow as certain thematic funds as one has ample manoeuvring space reducing the risks.

What are the inherent risks involved in putting money in funds following the manufacturing theme?

One macro risk is that if the government’s intent to step up manufacturing falters, the theme may not work as envisaged. Large parts of manufacturing are vulnerable to commodity price spikes in relation to their margins hence these can prove to be temporary headwinds in stock performance.