HDFC Transportation & Logistics Fund NFO: Should you invest?

As the domestic economy gets back firmly on its feet after the pandemic, given that it is in a relatively better-placed situation on growth with inflation coming under control and the GDP rising at a reasonable pace, many sectors would be beneficiaries. Added to this is the attractive demographics in India currently and the increasing propensity of millennials to become upwardly mobile and consume more.

In this regard, the transportation segment – auto original equipment manufacturers (OEMs) and auto ancillaries, airlines and railways – and the logistics sector are excellent proxies for investors to gain from the market rally in these companies. After being in a downturn for the last few years, these segments look set to make sharp gains over the next several years.

HDFC Transportation & Logistics Fund looks to invest in the theme and ride the positive cycle. The NFO is open for subscription till August 11. Should you invest in it? Here’s what you should know before investing in it.

What drives the theme

The basis for India’s consumption story stems from a set of key demographic and economic factors. India’s median age is only 28 years as of 2022. And the country is expected to add 97 million people to the working population in the next 10 years. Multiple estimates from various financial and research institutions indicate that India’s per capita GDP to touch $3,000 in FY25 and over $4,800 by FY30. Clearly, consumption would be a major beneficiary with the young especially looking to spend more.

Compared with most other countries in Asia and western economies, India still ranks low on the number of cars owned per capita (number of cars per 1,000 persons). This low figure of 28 cars (China: 232; Brazil: 193; and Mexico:231) gives vast scope to grow manifold over the coming years and decades. There is, thus, a huge potential market for automakers to address.

After a rather dull decade, the volume growth of passenger vehicles and two-wheelers is expected to zoom ahead. Between FY22 and FY27, volumes may double, growing at a compounded annual growth rate (CAGR) of 12-15 per cent. There is a premiumisation push as well. The share of SUVs and MUVs in the passenger vehicle segment has more than doubled from 24 per cent in 2017 to 51 per cent in 2023.

When automakers experience a strong cycle, the ancillary companies, too, end up benefiting significantly.

Then, there is the airline segment where there is an increasie in the number of passengers flying after the opening up of travel avenues post-Covid. As many as 123.2 million domestic passengers flew in airlines domestically during 2022, 47 per cent more than in 2021. The low air travel penetration and the increasing share of non-metro passengers using airlines could be a significant driver.

On the logistics part, we have diverse segments. Logistics is a ₹16.28-lakh crore segment and is expected to grow to ₹27-lakh crore by 2026. Apart from regular parcel and courier services, the e-commerce segment will be a major driver for logistics, spanning rail, road, air and shipping routes. The shift from being an unorganised industry to an organised segment will also push growth.

The government’s initiatives such as the National Logistics Policy (NLP), providing excellent road and port connectivity, frameworks — to reduce logistics costs, and the Unified Logistics Interface Platform (ULIP) – unifying data on a single platform are positives for the segment.

Investors, take note

HDFC Transportation & Logistics fund will invest 80 per cent of its portfolio in the sectors mentioned above. It will follow a flexi-cap strategy, though large-caps could dominate. It will be benchmarked to the Nifty Transportation & Logistics TRI. This benchmark has done better than the broader market Nifty 500 TRI in 13 of the past 18 calendar years. As of June 30, the index has delivered 17.5 per cent returns annually over the past 10 years.

There are very few funds tracking this theme. UTI Transportation & Logistics is the oldest and has been around for more than 19 years. It has delivered over 21.1 per cent returns in the last 10 years. While it has picked up in performance over the past three years, it does lag behind over the five-year period, thanks to the troubled phase for all the sectors in the theme over 2018-2020. Bandhan and ICICI Prudential rolled out schemes tracking the theme less than a year ago and, therefore, have a limited track record.

Given the cyclical nature of the many sectors that make the overall theme, timing of entry and exit becomes important for investors, which may be quite challenging. For retail investors, it may be worthwhile waiting for the new scheme to develop a track record before taking exposure, even though the fund house pedigree is high, and the theme seems quite promising.

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