Weekly Musings – NFO Pick (HDFC Manufacturing Fund)

15 Apr 2024 , 10:33 AM

WHY THE BIG BET ON MANUFACTURING

The global experience has been that as economies transition from mid growth to long term sustainable growth, there is also a shift in the profile of GDP and employment from agriculture to manufacturing. Today, manufacturing contributes about 15% of GDP and that must transition to over 20% of GDP if the Indian economy has to transition to $5 Trillion economy in 4 years and $10 Trillion in the next 10 years. Between FY23 and FY30, India’s nominal GDP is expected to more than double to $7 Trillion, while the manufacturing GVA is expected to grow nearly 3-fold. While the overall exports are likely to double by 2030, the merchandise exports are likely to grow 2.6 times, underlining the role of manufacturing.

WHY BET ON MANUFACTURING NOW?

The other big question is, why bet on manufacturing now, at this juncture? Manufacturing assumes importance for India due to 4 distinct factors that are favouring manufacturing.

• First is the opportunity matrix that is making manufacturing a natural fit for the Indian economy. India already has a large consumer base and this is likely to expand with the growing GDP and income levels. In addition, the China Plus One policy has opened up a new opportunity in manufacturing for India.
• There are also several natural advantages for India. It already has a skilled pool of labourers and the cost relative to other countries is substantially lower. Also, the support services and the infrastructure and logistics have been improving rapidly.
• The macro environment is also getting more conductive to manufacturing. The government is now focusing on Make in India, Atma Nirbhar Bharat and PLI based manufacturing. GDP growth and inflation are stable, while Indian companies are seeing the advantage of historically low levels of leverage on their balance sheets.
• Finally, some of the regulatory issues like retrospective taxation, ease of doing business, FDI policy, approval of projects through single-window clearance, and a sloe of Free Trade Agreements (FTAs) have all been very successful in making the India story the perfect one for a manufacturing thrust.

In last few years there has been substantial investments in infrastructure and logistics that has made Indian business competitive globally.

WHAT YOU MUST KNOW ABOUT HDFC MANUFACTURING FUND

Here are 4 essential of the HDFC Manufacturing Fund NFO.

• Nearly 80% of the core portfolio of the fund will be invested in equities representing the diverse sectors in manufacturing. This includes predominantly capital goods, oil & gas, automobiles, healthcare, consumer goods, FMCG, metals and Chemicals.
• The investment style will be bottom-up with runway of sustained growth. The focus will be on manufacturing companies benefiting from government initiatives, positioned to substitute imports or boost exports.
• The portfolio will be well diversified across sectors. Its area of focus would be spread across more than 10 sectors. However, the top 5 sectors will have 70% exposure and even within sectors, the theme would purely be on manufacturing only.
• The fund composition will be flexible across market cap classification. The universe of 691 manufacturing companies targeted by the HDFC Manufacturing Fund has 43 large caps, 76 mid-caps and 572 small caps. In terms of market cap share, large caps are 55% of the mix, mid-caps are 22% and small caps are 23%, so portfolio will be balanced.

Manufacturing covers nearly 37% of the BSE market cap and is a good microcosm of India Inc for the investors.

MANUFACTURING IS THE BEST MOMENTUM PLAY AT THIS POINT

If one looks at the returns and the reward to risk ratio of the Nifty Manufacturing Index the performance of the manufacturing index is almost at par with the Nifty and the Nifty 500 index over a 10 year and 15 year period. However, over a 1 year, 3 year and 5-year time frame, the Nifty Manufacturing Index decisively outperforms the Nifty and the Nifty 500. How do we interpret this data. For one, the big story of manufacturing is the story of momentum. These sectors have come into prominence in the last couple of years, which explains why the short term returns on manufacturing are much better than the long term returns. From an NFO perspective, it means that investing in the Nifty Manufacturing Fund NFO would be all about being in the right place at the right time.

WHO SHOULD LOOK TO INVEST IN HDFC MANUFACTURING FUND NFO?

Being an equity fund focused on the manufacturing theme, fitment obviously matters. Here are some quick takeaways.

• The theme is best suited as part of the core and the satellite portfolios. Manufacturing being 37% of market cap is obviously part of any core theme. As a satellite strategy, this can be used to enhance alpha in the short to medium term.
• This is an equity fund and also a thematic fund and hence the risks are dual. This fund is, therefore, best suited to investors who have the willingness and capacity to assume such additional risk, in the quest for alpha.

Above all, Manufacturing is a bet on India’s journey to a $5 Trillion economy by 2028.

PERFORMANCE OF MANUFACTURING FUND PROXIES IN INDIA

Here is a quick look at the open ended Manufacturing Fund proxies in India as of April 12, 2024. These are CAGR returns for beyond 1 year, and pertain to direct plans. Also, since Manufacturing Funds are not a distinct part of thematic fund categories, we have culled out proxies that closely match a Manufacturing fund.

Scheme Name	1 Year (%) Returns	3 Year (%) Returns	5 Year (%) Returns	Launch (%) Returns	AUM (₹ Crore)
Kotak Manufacture in India Fund	49.88			27.64	1,849.11
ICICI Prudential Manufacturing Fund	66.43	33.25	25.18	24.05	3,535.78
Invesco India Infrastructure Fund	75.37	38.28	29.21	21.15	1,014.76
Quant Infrastructure Fund	82.63	44.00	36.88	20.55	2,770.52
Kotak Infrastructure and Economic Reform Fund	55.34	36.94	25.97	19.71	1,708.69
Bank of India Manufacturing & Infrastructure Fund	62.04	33.54	27.17	18.23	272.57
ICICI Prudential Infrastructure Fund	66.70	43.80	27.53	18.03	5,012.88
Canara Robeco Infrastructure Fund	59.32	35.49	25.28	17.75	555.47
Tata Infrastructure Fund	69.40	36.73	26.48	17.50	1,983.86
Bandhan Infrastructure Fund	79.73	37.57	25.72	16.92	1,113.94
Aditya Birla Sun Life Infrastructure Fund	61.01	32.42	22.69	16.82	1,025.55
SBI Infrastructure Fund	67.34	36.36	25.87	16.77	2,586.29
Nippon India Power & Infra Fund	78.26	40.09	27.03	16.54	4,729.10
Taurus Infrastructure Fund	61.93	26.63	20.98	15.78	8.60
LIC MF Infrastructure Fund	67.36	34.63	23.72	15.70	242.54
Sundaram Infrastructure Advantage Fund	59.39	30.51	21.39	14.99	917.76
UTI Infrastructure Fund	55.07	27.84	19.75	14.11	2,120.33
HDFC Infrastructure Fund	83.13	42.93	21.01	13.56	1,769.49
Aditya Birla Sun Life Manufacturing Equity Fund	51.38	20.06	17.70	13.03	911.89

Data Source: AMFI India

In the table above, we have selected a cross section of 19 funds that closely match manufacturing fund, although we cannot say that all these closely represent the HDFC Manufacturing Fund. These comparisons are purely for the purpose of understanding. We have considered a total of 19 funds with such manufacturing fund characteristics. Here are highlights of the performance of these funds across time frames.

• The return dispersion is fairly high and that is largely because this is a fluid combination of sectors and market caps and are built around a theme, which itself has just about emerged in last few years. On a 1-year returns basis, proxies for manufacturing funds in India generated maximum returns of 83.13% and minimum returns of 49.88%, showing substantial variation due to the flexible nature of the definition of manufacturing theme. The average returns over a 1 year period are 65.88%, which is fairly impressive. However, it must be noted here that in a theme like manufacturing, 1-year returns may not be too reflective of the real story and could have a lot of euphoria built into it.
• Based on 3-year CAGR returns, the open-ended proxies for manufacturing funds in India generated maximum returns of 44.00% and minimum returns of 20.06%, showing a fairly high variation. The average returns CAGR over a 3-year period were 35.0%, a fairly impressive return. On 5-year CAGR basis, the open-ended proxies for manufacturing funds in India generated maximum returns of 36.88% and minimum returns of 17.70%. The average returns CAGR over a 5-year period were 24.98%, again fairly impressive.
• Finally, based on returns since launch, the proxies for manufacturing funds in India generated maximum returns of 27.64% and minimum returns of 13.03%, showing fairly attractive base case returns. The average returns since launch were 17.83%. While these are proxies and not representative of the theme in totality, the theme appears to be quite attractive on a short term and long term basis.

However, we must keep in mind that these are proxies for manufacturing funds and not really representative of any sectoral or thematic trends. It is about getting a rough idea of the returns and variation risk in such funds that reflect the manufacturing theme.

GLANCE AT THE HDFC MANUFACTURING FUND NFO

Here are some details of the HDFC Manufacturing Fund NFO you must know to decide on investing in the fund.

a. The NFO of HDFC Manufacturing Fund opens for subscription on April 26, 2024 and will close on May 10, 2024. Being an open-ended equity scheme, the fund will offer buy and sale at NAV linked prices. While the fund has no lock-in period, it is best to hold such thematic funds for a period of 5-7 year or more to get full manufacturing cycle benefits.

b. On the Standard SEBI Risk-O-Meter, the HDFC Manufacturing Fund will be ranked as a Very High Risk Fund. The high risk is due to the predominant exposure to equities that the HDFC Manufacturing Fund will have. In addition, there is also the risk of entering into the fund when the market is at all-time highs. Being an actively managed fund there is also the discretion risk of fund managers; apart from the thematic bias.

c. The HDFC Manufacturing Fund is about long term capital appreciation with the theme of manufacturing to coincide with India becoming the manufacturing hub of the world. The HDFC Manufacturing Fund bets that manufacturing will be coincidental with the growth of the Indian economy in the coming years, as India transforms to a $5 Trillion economy.

d. Investors can invest in the NFO of HDFC Manufacturing Fund in minimum size of ₹100 and in multiples of ₹1 thereof. This also applies to switch-ins during the NFO and additional purchases. Exit loads will be charge at 1% of the redemption amount if redeemed or switched out within 1 month of allotment. Beyond 1 month, there is no exit load.

e. The HDFC Manufacturing Fund does not give any guarantee on returns, being a pure equity fund. The fund will maintain 80-100% exposure to equities, while the balance may be spread across debt, liquid assets, gold, and REITs. The fund has full flexibility in toggling the portfolio mix between large caps, mid-caps, and small caps. Investors are advised to hold on to the fund for minimum of 5-7 yeas to get full cycle benefits.

f. The HDFC Manufacturing Fund NFO will offer the growth option as well as the IDCW (income distribution capital withdrawal) payout option. It will offer the facility to invest via the Regular Plan or through the Direct plan. The NAVs on redemption will be different for regular plans and dividend plans based on the TER imputed to the fund. The NAVs of growth plan and IDCW plan will differ to the extent of dividends declared.

g. The fund is best suited for investors with a higher risk appetite and the ability to stay invested for a longer period of 5-7 Investors in the HDFC Manufacturing Fund NFO must be prepared for the additional risk of thematic fund, since this fund is a big bet on the transformation of the Indian economy in the coming years.

h. The HDFC Manufacturing Fund will be benchmarked to the Nifty India Manufacturing Index TRI. The TRI (total returns index) is more reflective as it includes the impact of dividends and capital movement. This benchmarking is used to evaluate whether the fund is underperforming or outperforming the underlying benchmark. The fund manager for the HDFC Manufacturing Fund will be Rakesh Sethia.

i. The HDFC Manufacturing Fund NFO will allocate its corpus predominantly to equities while a small portion may be allocated between debt and liquid assets. With equity exposure decisively above 65%, it will be classified as an equity fund for tax purposes. The short term capital gains (held for less 1 year) will be taxed at 15% while long term capital gains (held for over 1 year), will be taxed at a flat rate of 10% beyond a minimum threshold exemption of ₹1 Lakh per financial year.

The HDFC Manufacturing Fund NFO is an opportunity for investors to participate in companies that are on the cutting edge of the manufacturing paradigm shift. The theme is expected to be value accretive in the coming years.