‘Transportation & logistics fund will try to lessen the cyclicality of auto sector’

NEW DELHI: ICICI Prudential Asset Management Company Ltd recently launched a transportation and logistics fund that will invest in auto original equipment manufacturers (OEMs), auto components (ancillaries) makers, and logistics companies. A slew of funds that have been launched in recent times on this theme. Harish Bihani, senior fund manager at ICICI Prudential AMC, spoke to Mint about ICICI Prudential Transportation and Logistics Fund and why fund houses are bullish on this theme. Edited excerpts:

Take us through the construction of your transportation and logistics fund. Which sub-sectors will you focus on and how many stocks you will have in the fund?

The fund will invest in auto original equipment manufacturers (OEMs), auto ancillary, and logistics companies. Within the theme, we have identified over 100 reliable companies including those in the passenger vehicle, two- and three-wheelers, commercial vehicles, ports, shipping, rail transport, road transport, warehousing, e-commerce and food delivery sectors. Around 31 stocks make up the Nifty transportation and logistics benchmark index. Our fund will most likely contain 40-50 stocks that will try to have higher indexation to the auto ancillary, logistics, and mid- and small-cap space than the benchmark.

The benchmark to the fund (Nifty Transportation and Logistics Index) has a weightage of 74% for automobile and auto components. Will it then become a proxy for the auto theme?

Our fund will undoubtedly serve as a decent proxy for the auto theme. However, by identifying structural ideas in the logistics space, we will try to lessen the cyclicality of the auto sector in our fund. In an effort to reduce portfolio cyclicality, we will also make judicious use of the 20% fund limit that can be invested in any other themes besides auto and logistics.

Why is the transportation and logistics theme getting attention from mutual fund houses?

The theme includes companies with strong growth prospects, longevity, anti-fragility, and good return on invested capital (ROIC) over cycles. The sector’s volume growth has been subdued over the past 10 years due to various macro or micro headwinds. As the headwinds recede, the theme appears ripe for outperformance.

What are tailwinds for this theme?

Over the next three-five years, the auto and logistics sectors will likely experience tailwinds, including improving volume growth, better value growth led by higher premiumisation, and improved margins as commodity headwinds subside. Also, Indian companies are increasing their share in the global export market, and this trend is likely to persist. These tailwinds will likely ensure a healthy outlook for earnings growth, which, ceteris paribus, should ideally be reflected in the stock price over the medium term.

Any headwinds for this theme?

In the near future, the space faces headwinds from rising interest rates and a slowing global economy that would affect export demand. Nevertheless, some of these headwinds seem transitory and are not likely to upset the theme’s medium-term earnings outlook.

The transportation and logistics theme has witnessed many periods of stagnant growth, including the last five years. Why does this theme go through periods of underperformance, and why do you think this theme is set for a revival?

Five significant disruptions have occurred over the past six years, beginning with GST implementation, followed by IL&FS crisis, demonetization, covid-19, and the Russia-Ukraine crisis. Additionally, the sector saw several regulatory changes, like the transition from BS-IV to BS-VI, changes to safety norms, insurance premium hikes, etc., which increased the cost of vehicle purchase. The above-mentioned disruptions impacted affordability and led to lower demand or supply along with component shortages. Accordingly, the sector’s volume growth and margins were tepid, which had a negative impact of earnings and stock price performance. The good news is that these headwinds appear to be gradually abating, which indicates a healthy earnings growth outlook over the next three-five years.