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Why you must put money into UTI Transportation and Logistics Fund

‘What comes down, should go up’ may be very true of cyclical sectors equivalent to auto.

After a hiatus which began effectively earlier than the pandemic, the auto cycle is wanting up now with utility car (UV) and business car (CV) gross sales main the pack. A projection based mostly on new car gross sales volumes achieved within the first quarter of this fiscal (April-June 2022) reveals that whereas sale of latest vehicles together with UVs can develop 18.6 per cent year-on-year in 2022-23, CVs (gentle, medium and heavy) volumes are anticipated to develop 25 -26 per cent this fiscal; Two- and three-wheelers volumes, about 10 per cent. After peaking out in 2018-19, the brand new autos gross sales volumes have been in contraction mode within the final three fiscals.

With the Nifty Auto index being among the many greatest performers thus far this yr vis-à-vis a flat Nifty, the market has already recognised the flip in fortunes. Inventory costs within the sector have moved up as effectively, with over 50 of the 171 listed entities within the section touching all-time highs because the October 2021 market peak. Valuations have expanded too. Over 41 shares sport a trailing PE higher than 25 occasions now, vis-à-vis solely 14 of them three years in the past.

Nevertheless, given the auto cycle sometimes holds for about two-three years, at present there may be nonetheless a case for tactical funding in funds centered on the auto sector. Those that have a excessive urge for food for threat can contemplate investing within the UTI Transportation and Logistics (UTI T&L) fund as a part of their satellite tv for pc portfolio. That is the one lively fund centered on the sector at the moment. Whereas now we have offered Nifty Auto ETFs too pretty much as good funding choice based mostly on technical evaluation in our Big Story titled What charts say about 6 key sectors and play them, this fund is for these keen to stroll the additional mile for added returns. A every day rolling-return evaluation of the typical returns for one, three and 5 years over the previous 10 years present that the fund has comprehensively been capable of beat the bellwether Nifty TRI, the broader Nifty 500 TRI in addition to the Nifty Auto TRI throughout these durations. Lump-sum investments in two or three tranches might be thought of, to benefit from intermittent corrections on account of broader market volatility.

Tailwinds for the sector

Information from Capitaline reveals that whereas value will increase and restoration in demand to an extent have introduced again combination revenues for listed auto and auto element gamers near 2018/19 ranges within the yr ended March 2022, earnings are nonetheless far-off from what was achieved then. This means stress on the working stage from lack of leverage in addition to excessive enter costs. Being a extremely raw-material intensive business (RM to gross sales ratio of about 65 per cent roughly), the cooling-off in costs of base metals equivalent to aluminum, copper, lead, zinc in addition to metal is a tailwind for the sector now. Regular monsoons (+6 % departure from LPA for the nation as a complete at the moment), enhance in crop and agri-commodity costs in addition to the federal government’s deal with infrastructure via the PM Gati Shakti initiative spells effectively for private autos in addition to CVs. Freight charges for highway transport — a proxy for financial exercise — as measured by the CRISIL Pan India Freight Index, can be indicating robust demand for items carriage. Given the federal government’s deal with enhancing EV penetration, most car makers and suppliers are gearing up for the change too, with mid- and small-cap suppliers centered on EVs, within the limelight available in the market rally since March 2020.

Fund portfolio and technique

Of the 171 shares listed within the auto area, large-caps are solely eight in quantity, whereas there are about 149 small-cap shares. The fund has been capable of outperform the Nifty Auto index on a constant foundation due to its diversified portfolio together with mid- and small-cap shares. It at the moment holds about 27 per cent in these segments. Outstanding auto small-caps within the newest portfolio embrace Minda Company, Sandhar Applied sciences and Jamna Auto.

UTI T&L sometimes holds a complete 30-35 shares. Normally, Maruti Suzuki, M&M, Bajaj Auto, Tata Motors and Eicher Motors are its high bets with 8-18 per cent stake in every of them. The remainder of the holdings are well-spread. The fund has rightly added to its holdings in Ashok Leyland since 2021, to learn from the restoration in CVs. With two-wheelers seeing the slowest restoration thus far, its stake in Hero MotoCorp has come right down to 2.four per cent now, from about 8-9 per cent ranges in mid- and late-2020. Powerful competitors from electrical bikes when gasoline costs shot via the roof in addition to a rural slowdown in 2021 took the glamour off this inventory. The inventory has marginally declined within the final yr. Endurance Applied sciences is a current entrant. Timken and Balkrishna Industries have been exits within the final yr, in all probability on account of excessive valuations.

Why

The fund has been capable of outperform the Nifty Auto index on a constant foundation due to its diversified portfolio together with mid- and small-cap shares

Whereas 78 per cent of the holdings is in auto and auto elements, about 12 per cent is from logistics that are additionally a play on financial exercise choosing up. Adani Ports, VRL, Mahindra Logistics are a number of the distinguished shares held.

The fund has normally been taking on 95 per cent publicity in equities over the previous few years.

Revealed on

August 06, 2022


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