Time to explore transportation and logistics funds

The Nifty Transport index, dominated by auto and auto-ancillary components, has long been in the limelight. However, the attention of investors is gradually shifting towards the Transportation and Logistics sector, spurred by recent fund launches from prominent houses.

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Aditya Birla Sunlife Mutual Fund (Aditya Birla Sunlife Transportation and Logistics) and HDFC Mutual Fund (HDFC Transportation and Logistics Fund) are the latest entrants to this club, managing assets in the range of ₹5,500-6,000 crore.

In this landscape, the UTI Transportation and Logistics Fund stands as the oldest player. Currently, there are five schemes, including ICICI Prudential Transportation & Logistics Fund and Bandhan Transportation & Logistics (formerly IDFC Mutual Fund), based on this theme, along with the Nifty Transportation & Logistics.

While UTI fund has displayed a commendable CAGR of over 15 per cent since inception, the relatively new ICICI Transport, launched last October, boasts an impressive 33 per cent return in the last year.

However, a noteworthy aspect is the Nifty Transportation & Logistics index’s heavy reliance on auto and auto-ancillary companies (such as Tata Motors, M&M, Maruti, TVS Motor, MRF, Sundram Fasteners, Bajaj Auto, CUMI), overshadowing pure logistics players. Understandably, the exposure of these companies to logistics is minimal due to their low market-cap and performance metrics.

Growth prospects

Looking beyond the index, the Indian and global logistics market presents a substantial addressable opportunity, projected to reach approximately $385 billion by fiscal 2027, growing at a 13 per cent CAGR from fiscal 2022-27. Global projections are even more staggering, estimated to hit $13.6 trillion by 2026, growing at a 6.7 per cent CAGR from 2020-26. These figures, quoted in an IPO paper by TVS Supply Chain Solutions, relying on Armstrong & Associates Inc and Redseer, underline the vast potential in the sector.

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However, amidst this optimistic outlook, it’s crucial to acknowledge challenges. Trade issues and the lingering effects of the Covid-19 pandemic have highlighted the intricate nature of supply chains. Consequently, there is a rising trend towards end-to-end outsourcing, with organisations increasingly seeking supply chain companies not only for supply chain and logistics management but also for additional specialised services.

The logistics industry, marked by intense competition and a multitude of unorganised players, grapples with fragmentation, especially in commoditised segments. Success stories of Singapore-based CapitaLand Ltd, WelspunOne, ESR India, IndoSpace, and others raising funds for logistics with a focus on warehousing, indicate a specific trend. Traditional logistics players are expected to shift their focus towards lucrative warehousing spaces.

For instance, Allcargo Gati recently announced the establishment of a Surface Transhipment Centre and Distribution Warehouse (STCDW) at Mayasandra, Karnataka.

ICRA anticipates a positive demand scenario for the road logistics sector in FY2024, propelled by stable domestic consumption and investment demand. The industry’s revenue growth is estimated at 6-9 per cent in FY2024, building on the elevated base of FY2023. This growth is fuelled by demand from diverse segments, including e-commerce, FMCG, retail, chemicals, pharmaceuticals, and industrial goods. The industry’s shift towards organised logistics players, post-GST and e-way bill implementation, further contributes to this upward trajectory.

While the inclusion of pure logistics players in the index might not be imminent, the sector is heading towards intriguing times, poised to shine alongside India’s growth story.

In conclusion, navigating the promising yet complex Transportation and Logistics sector demands a nuanced comprehension of both its potential and challenges. As investors venture into this realm, adopting a diversified approach and staying abreast of the industry’s dynamics will be key for navigating the exciting days ahead.

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