Mutual Funds

UTI Transportation and Logistics: Time to park some money here

Parvatha Vardhini C | Updated on July 11, 2020 Published on July 11, 2020

The downturn in new vehicle sales provides a good entry point, but keep a close watch

Investors with a high risk appetite can consider UTI Transportation and Logistics (UTI T&L). The scheme is a sectoral fund that predominantly focusses on the auto and auto ancillaries segment.

The current downturn in new vehicle sales provides a good entry point. Investors can take advantage of the market volatility by investing a lump sum in two or three tranches. However, investors should keep in mind that it is equally important to time the exit when taking exposure to sectoral funds. Hence, only those who can keep a close watch on the auto industry cycle should take exposure. Sectoral schemes must form part of your ‘satellite’ portfolio and should not be used to save for long-term goals.


Cyclical downturn

New vehicle sales, which had been already facing multiple challenges since mid-2018, has further been hit due to Covid-19. Overall, volume growth for the auto industry, which stood at 5.15 per cent in 2018-19 (over the previous fiscal), dropped by about 18 per cent in 2019-20.

This fiscal, too, has begun on a weak note with the Covid-19 outbreak forcing production cuts and dealership shutdowns.

Job losses, pay cuts and income uncertainty are dampeners to purchases at this juncture.

Besides, commercial vehicle sales are faced with bigger challenges, with the overall economic slowdown decreasing demand for freight carriage.

The revised permit for vehicles to carry higher loads (new axle load norms) have also been a big blow to new truck sales.

While auto manufacturers expect some green shoots from the second half of this fiscal, CRISIL expects the auto industry to record a 21-28 per cent fall in volumes in 2020-21. A meaningful recovery in new vehicle sales could be possible only in the next fiscal.

Investors can use this opportunity to invest in UTI T&L, which is the only fund focussed on the auto industry. Over longer periods of three, five and 10 years, the scheme has beaten the S&P BSE Auto Index by 1.5-5 percentage points.

Portfolio and strategy

Despite being a sectoral fund, UTI T&L does not hold a very concentrated portfolio — it usually has about 35 stocks. With a 19 per cent allocation, Maruti Suzuki is its top holding. Being the market leader in the passenger vehicle segment (in volume terms), Maruti has always been the top pick for the fund.

The scheme has slowly increased its stake in the stock, from about 15 per cent levels in the beginning of 2019. Maruti has gone up by almost 45 per cent since the March 2020 market low. Expectation of a shift to personal mobility following the pandemic, along with the pocket friendliness of compact cars, are key drivers for the stock.

The fund’s holdings in other top stocks such as Eicher Motors, Hero MotoCorp, Mahindra & Mahindra, and Bajaj Auto range 5-8 per cent each. With rural consumption faring better than urban, the fund has latched on to the theme by adding Hero MotoCorp and M&M.

Given that commercial vehicles (CVs) have had a bad run, the scheme has reduced its exposure to Ashok Leyland and to CV suppliers such as Automotive Axles.

UTI T&L tends to reduce its exposure to equities to around 90 per cent during slowdown years — 2015 and 2016 being examples. As of May 2020, it holds 95 per cent — lower than the 98 per cent it held at the beginning of the year — in equities.

Waiting for the theme to play out, the fund follows a buy-and-hold strategy. Hence, the portfolio turnover stands at a low 11 per cent. Its portfolio PE at 19.73 times is much lower than that of the S&P BSE Auto Index’s 30.37 times.

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Published on July 11, 2020
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