Amid surging inflows in to mutual funds, SBI MF sees big opportunities for sectoral funds

SBI MF points that the automobile industry in India is significantly under penetrated


Automobile sales have seen strong growth over the past year. Sales across segments have seen good traction and that has also lifted shares of automotive companies. The BSE Auto index is up over 63 per cent over the past year. In comparison, the BSE Sensex has gained 19 per cent. Now, while many would be thinking whether to buy auto stocks now or whether the rally is done, the country's largest asset manager believes the sector is a long-term play and is launching a scheme dedicated to this space.

SBI's Automotive Opportunities Fund will be a first-of-its-kind sector fund targeting the automobile space. There are 134 companies in the fund's target universe, which includes vehicle manufacturers, auto components and equipment makers, companies into castings and forgings, tyre and rubber products, compressors, pumps and diesel engines, bearings, auto dealers etc. The fund itself will aim to have a portfolio of around 25-30 stocks from this universe.

Why an auto sector fund now?

SBI MF points that the automobile industry in India is significantly under penetrated and that provides huge long-term opportunities.

"Penetration of two-wheelers and four-wheelers in India per 1,000 people is still significantly low as compared to other economies, thereby offering headroom for growth in the future," it said. 

India, for instance, has 120 two-wheelers per 1,000 people. In comparison, China has 325 and Indonesia has 460. The four-wheeler space is even more under penetrated. India has 34 four-wheelers per 1,000 people, compared with 223 in China and 860 in the United States, SBI MF noted.

Further, truck penetration in India at 3 per 1,000 people is also much lower than in US (15) and China (28), highlighting the potential for growth in the commercial vehicle (CV) space, the fund house added.

Then there is a huge auto component industry, where companies stand to benefit from the ongoing premiumisation trend, which is driving demand for things like sun-roof, alloy wheels, airbags, connected tech among other things. Rising sales of electric vehicles and the growing EV ecosystem should also boost sales of companies in that space. 

Separately, there is also a scope to boost exports of automobiles and components from India, given that Indian steel prices are now cheaper than Europe and US, labour in India is cheaper than even in China and cost of electricity is also among the lowest, SBI MF added. 

Fund manager Tanmaya Desai, who will manage this automotive opportunities fund, pointed that the sector is a high growth proxy for the broader manufacturing theme in the country.


Valuations a concern?

Automotive stocks have accelerated over the past year. But, the valuations today are still at par with historical valuations, said Desai. 

"Even when we look at the Nifty Auto premium over Nifty, its at around 9-10 per cent, almost similar to what history suggests. So, to that extent, valuations are not a overarching cause of concern, when we look at it today, versus history," he said. 

What must be noted is that sectors will at times go through a long phase of upcycle or downcycle or stay flat for a long time. This has a bearing on sectoral or thematic funds too. So, for instance, over the past year fast moving consumer goods companies have lagged broader markets in the backdrop of slowdown in demand. Autos too have gone through a similar phase in the past. That is why many analysts recommend investors would do well investing in diversified funds. 

Desai points that within the automobile space, two-wheelers, four-wheelers, commercial vehicles and tractors may not necessarily move up or down at the same time. They will have their own cycles and therefore one would have to stay invested in such a thematic fund over several years. 

"If one has to adequately capture the various cycles within auto, could be the two-wheeler cycle, it could be CV growth, it could be premiumisation within passenger vehicles or exports, one will need to have an investment horizon of 3-5 years. You will then adequately capture the cycles and not only worry about the shorter term phenomenon," said Desai.

According to Association of Mutual Funds of India data, SBI MF had average assets under management (AUM) of over Rs 9.14 lakh crore in the January-March 2024 quarter. The mutual funds industry has seen strong traction over the last few years. The industry is now getting over Rs 20,000 crore through SIPs alone and the net assets under management of the industry have crossed Rs 57.25 lakh crore in April. 

SBI's bet on thematic/ sectoral funds

Amid the record inflows into mutual funds, sectoral or thematic funds like this auto sector fund or the energy opportunities fund it had launched earlier, will offer unique opportunities to investors, DP Singh, deputy MD and joint CEO of SBI MF feels.

He pointed that a diversified fund will only have around 40-50 stocks and therefore there was limited opportunity to go deep in a particular sector, which is possible through a dedicated sectoral fund. The auto sector weight in the BSE 100 for instance is only around 7.5 per cent as of March 2024.

Singh, therefore, feels the thought process on thematic funds or sector funds needs a change.

"Today with the market cap of almost Rs 28-29 lakh crore in the automotive sector itself, I think its a big play. We can definitely create a diversified portfolio. Same is true with others (sectors)," pointed Singh.

Today, even some of the sectoral funds have become large as investable opportunities have grown across sectors. For instance, SBI's Energy Opportunities Fund has a AUM of around Rs 8,500 crore.

The AUM of thematic funds at SBI MF is now close to Rs 20,000 crore, Singh noted.

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