Weekly Musings – NFO Pick (Groww Nifty EV & New Age Automotive ETF)

24 Jul 2024 , 09:28 AM

WHERE WILL GROWW NIFTY EV & NEW AGE AUTOMOTIVE ETF INVEST

The investment objective of the Groww Nifty EV & New Age Automotive ETF is to generate long term capital growth by investing in securities of the Nifty EV & New Age Automotive  Index. Being a passive index ETF, it will invest in the same weightage as the index with the intent of providing returns before expenses that track the total return of Nifty EV & New Age Automotive Index. The one key endeavour of the fund would be to minimize the tracking error, which is the probability that the fund performance diverges from the index performance. The fund is classified as a high risk passive fund and cannot assure returns.

The Groww Nifty EV and New Age Automotive ETF will be a passively managed fund with investments in stocks in the same proportion as in the Nifty EV & New Age Automotive Index. The fund will invest in a basket of stocks forming part of Nifty EV and New Age Automotive Index in similar proportions. The investment strategy and the role of the fund manager would largely predicate around reducing the tracking error to the least possible through regular rebalancing of the portfolio. The fund manages will also occasionally look at change in weights of stocks in the Index as well as the incremental collections and redemptions in the Scheme. A small part of the funds may be invested in debt and money market instruments, to tap opportunities and for basic liquidity purposes.

WHAT IS THE NIFTY EV & NEW AGE AUTOMOTIVE INDEX ALL ABOUT?

The Nifty EV & New Age Automotive Index is the underlying benchmark for this passive fund. It aims to track the performance of companies forming part of the EV ecosystem in India. It will also cover companies that are involved in development of new age automotive vehicles or related technology. The Nifty EV & New Age Automotive Index has a base date of April 02, 2018 and a base value of 1,000. The Nifty EV & New Age Automotive Index includes stocks forming part of or likely to be a part of the Nifty 500 index at the time of review. Any stock that forms part of the Nifty 500 is eligible to be a part of the Nifty EV & New Age Automotive Index subject to being involved in the production and supply of electric or new age automotive vehicles, batteries, components, raw materials, and technology.

In short, it would include all companies that encompass the EV ecosystem in India; and includes companies that form the backwards and the forward integration for the supply chain. The overall weight of the stocks belonging to Group A (Manufacturing of 2W/3W/4W/PV/CV Electric and New age automotive vehicles) will be capped at 40%. The weight of each stock belonging to Group A shall be capped at 8%; while non-Group-A stocks will be capped at 4%. The index is reconstituted semi-annually and rebalanced on a quarterly basis.

CONSTITUENTS OF THE NIFTY EV & NEW AGE AUTOMOTIVE INDEX

The Nifty EV & New Age Automotive Index comprises of a total of 33 stocks. The table below captures the components of the index, with their respective industry classification.

Company Name	Industry	ISIN Code
Amara Raja Energy & Mobility Ltd.	Automobile and Auto Components	INE885A01032
Ashok Leyland Ltd.	Capital Goods	INE208A01029
Bajaj Auto Ltd.	Automobile and Auto Components	INE917I01010
Bharat Forge Ltd.	Automobile and Auto Components	INE465A01025
Bosch Ltd.	Automobile and Auto Components	INE323A01026
CG Power and Industrial Solutions Ltd.	Capital Goods	INE067A01029
Eicher Motors Ltd.	Automobile and Auto Components	INE066A01021
Exide Industries Ltd.	Automobile and Auto Components	INE302A01020
Gujarat Fluorochemicals Ltd.	Chemicals	INE09N301011
Hero MotoCorp Ltd.	Automobile and Auto Components	INE158A01026
Himadri Speciality Chemical Ltd.	Chemicals	INE019C01026
JBM Auto Ltd.	Automobile and Auto Components	INE927D01044
Jupiter Wagons Ltd.	Capital Goods	INE209L01016
KPIT Technologies Ltd.	Information Technology	INE04I401011
L&T Technology Services Ltd.	Information Technology	INE010V01017
Mahindra & Mahindra Ltd.	Automobile and Auto Components	INE101A01026
Maruti Suzuki India Ltd.	Automobile and Auto Components	INE585B01010
Minda Corporation Ltd.	Automobile and Auto Components	INE842C01021
Motherson Sumi Wiring India Ltd.	Automobile and Auto Components	INE0FS801015
Olectra Greentech Ltd.	Automobile and Auto Components	INE260D01016
Rattan India Enterprises Ltd.	Consumer Services	INE834M01019
Reliance Industries Ltd.	Oil, Gas & Consumable Fuels	INE002A01018
Samvardhana Motherson International Ltd.	Automobile and Auto Components	INE775A01035
Schaeffler India Ltd.	Automobile and Auto Components	INE513A01022
Sona BLW Precision Forgings Ltd.	Automobile and Auto Components	INE073K01018
TVS Motor Company Ltd.	Automobile and Auto Components	INE494B01023
Tata Chemicals Ltd.	Chemicals	INE092A01019
Tata Elxsi Ltd.	Information Technology	INE670A01012
Tata Motors Ltd.	Automobile and Auto Components	INE155A01022
Tata Technologies Ltd.	Information Technology	INE142M01025
Tube Investments of India Ltd.	Automobile and Auto Components	INE974X01010
UNO Minda Ltd.	Automobile and Auto Components	INE405E01023
Varroc Engineering Ltd.	Automobile and Auto Components	INE665L01035

Data Source: NSE

As can be seen from the above table, it is an amalgam of the entire EV and green automotive ecosystem ranging from EVs, e-buses, IT support players, specialty chemical companies, consumable fuels. Tata Motors has the highest weightage of 8.26% in the Nifty EV & New Age Automotive Index, followed by Maruti Suzuki 7.91%, Mahindra & Mahindra 7.85%, Bajaj Auto 78.84%, and Reliance Industries at 4.29%.

In terms of sectoral mix; automobiles and auto components account for 69.01% of the Nifty EV & New Age Automotive Index, Information Technology accounts for 13.48%, Chemicals at 8.08%, Capital Goods at 5.07%, and oil at 4.29%. The top 10 stocks account for nearly 67% of the total weight of the Nifty EV & New Age Automotive Index.

KEY NUMBERS PERTAINING TO NIFTY EV & NEW AGE AUTOMOTIVE INDEX

It is a recent index, so not much is known about performance. However, we have back tested for previous years and some interesting numbers of returns and risk emerge from the index. Here are the highlights.

• The total returns (TRI) on the Nifty EV & New Age Automotive Index over the last one year has been an impressive 62.57%. In the first 6 months of 2024, the returns were an impressive 33.1% on TRI basis. Over a 5 year period, the index has given returns of over 34% CAGR.
• In terms of risk, the levels are higher for the Nifty EV & New Age Automotive Index due to its sectoral tilt. The 5 year standard deviation at 20.58% is much year than the 1-year standard deviation at 14.09% on returns. The Beta is under 0.9, which means the stock has been sober relative to the index.
• The P/E ratio for the Nifty EV & New Age Automotive Index stands elevated at 35.16X, while the price to book is at 6.54X and the dividend yield at 0.83%. Let us revisit after a few minutes. The one year correlation at 0.76 is quite low and that helps the sectoral index to emerge as a good diversification agent for the portfolio.

Nifty EV & New Age Automotive Index offers a good mix of an opportunity and the benefits of a high quality portfolio.

PERFORMANCE OF NEW AGE EV FUNDS IN INDIA

Currently, we do not have a sizable number of funds from the EV / automotive space in India to enable a comparison. There are only 3 AMCs that have funds benchmarked to the Nifty EV & New Age Automotive Index. However, two of these funds are from ICICI Pru AMC and one from Nippon AMC. Mirae has just launched its EV / automotive fund and Groww AMC is next on the block. So, there is not much of a history available for comparison nor is there a substantial AUM to be able to draw significant conclusions. However, one common factor is that the 1 year returns on these funds has been in excess of 60%, which is not surprising considering that these category of funds have done very well in the last one year.

GLANCE AT THE GROWW NIFTY EV & NEW AGE AUTOMOTIVE ETF NFO

Here are some details of the Groww Nifty EV & New Age Automotive ETF NFO you must know to decide on investing in the fund.

• The NFO of Groww Nifty EV & New Age Automotive ETF opened for subscription on July 22, 2024 and will close on August 02, 2024. Being an open-ended thematic equity ETF with focus on new age auto stocks, it will reopen for sale and repurchase anywhere between 3 days and 15 days of NFO closure. The Groww Nifty EV & New Age Automotive ETF is best suited to investors looking for long-term capital appreciation through a focus on new age automotive stocks to leverage on the twin triggers of auto demand and greening of automotive vehicles
• On the Standard SEBI Risk-O-Meter, the Groww Nifty EV & New Age Automotive ETF will be ranked as a Very High Risk Fund. The high risk is an outcome of the predominant exposure to equities (80% to 100%) that the Groww Nifty EV & New Age Automotive ETF will have. In addition, there is also the risk of entering the market at lifetime highs of the Nifty and the Sensex. There is also the risk of concentrated exposure to the EV and new auto segment; despite being a passive fund benchmarked to the Nifty EV & New Age Automotive TRI Index.
• The Groww Nifty EV & New Age Automotive ETF is about generating capital appreciation from a concentrated portfolio of equity and equity related instruments. The focus will purely be on companies engaged in the electrical vehicles / new age automobile companies. This will include the manufacturers of these vehicles and also support services as well as companies that are integrated forwards and backward.
• Investors can invest in the NFO of Groww Nifty EV & New Age Automotive ETF in minimum size of ₹500 lumpsum and in multiples of ₹1 thereof. Minimum additional purchases will be of ₹500. This also applies to switch-ins during the NFO. The fund also supports the systematic investment plans (SIPs) and systematic transfer plans (STPs) with the minimum allocation.
• While there is no entry load, there will also be no exit load since this is a listed ETF with secondary market liquidity available. Hence, there is no exit load, irrespective of when the units are redeemed. However, leaving aside the issue of exit loads; investors are advised to hold the fund for a minimum period of 5-7 years to get full benefits of the focused theme of the Groww Nifty EV & New Age Automotive ETF.
• The Groww Nifty EV & New Age Automotive ETF does not give any guarantee on returns, being an equity oriented fund, and the performance is subject to the vagaries and vicissitudes of the markets in general and the theme of EV and new age autos in particular. Being a passive fund, the entire portfolio of the fund will be benchmarked to the Nifty EV & New Age Automotive TRI Index and the fund managers will purely focus on reducing the tracking error to the bare minimum. The fund will only offer the growth option for investors.
• The Groww Nifty EV & New Age Automotive ETF will be managed by Abhishek Jain, with the focus largely on reducing the tracking error of the fund. KFIN Technologies Ltd (formerly Karvy Computershare Ltd) will be the registrars to the issue. The intent of the fund is to generate long term capital appreciation by investing in stocks in the Nifty EV & New Age Automotive Index in the same proportion so as to provide returns before expenses that match the returns of the EV & New Age Automotive Index TRI. The main aim would be minimise the tracking error of the passive fund.
• The Groww Nifty EV & New Age Automotive ETF will be classified as an equity fund for tax purposes; as long as its equity exposure is above 65%, which is the intent. The short term capital gains (held for under 1 year) will be taxed at 20% (increased from 15% in Budget 2024-25 presented on July 23, 2024). The long term capital gains (held for over 1 year), will be taxed at a flat rate of 12.5% (increased from 10%) beyond a minimum threshold exemption of ₹1.25 Lakh (increased from Rs1 lakh per financial year). These rates were tweaked in the full budget presented by the Finance Minister on July 23, 2024. There is no indexation benefits on long term capital gains. Any dividends declared by the fund and paid will be subject to tax at the incremental rate of tax and the fund shall deduct TDS on such dividends, at the extant rates as stipulated by the CBDT.

The Groww Nifty EV & New Age Automotive ETF NFO offers an opportunity for investors to participate passively in a fund that offers a veritable play on the EV and new age automotive theme in India. The fund believes that EV & New Age Automotive theme will gain from the combination of strong auto demand and a rapid shift to green auto sector.