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How about investing in the most attractive consumption theme in the world

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Mutual Funds article in Advisorkhoj - How about investing in the most attractive consumption theme in the world
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Consumption is one of the most attractive themes for equity investors in India. What makes the consumption theme very attractive for long term investors is that, it is both cyclical and defensive. The cyclical aspect of consumption enables investors to get high returns over sufficiently long investment tenure in a growth market like India, while defensive aspect provides a degree of stability across different market cycles. Some retail investors associate the consumption theme only with Fast Moving Consumer Goods (FMCG) sector, but the broader consumption theme includes a wide variety of sectors, including automobiles, consumer durables, textiles, paints, media and entertainment, leisure, pharmaceuticals, power, telecom and other utilities. India’s growth story is one of the most attractive consumption stories in the world.

ICICI Prudential Bharat Consumption Fund – Series 1

ICICI Prudential Mutual Fund has launched an NFO, ICICI Prudential Bharat Consumption Fund – Series 1, aiming to benefit investors from Rising Consumption of India. The NFO opens on March 22nd and will close on April 5th. Veteran fund manager and ICICI Prudential CIO, Sankaran Naren and Atul Patel are the fund managers of this scheme. ICICI Prudential Bharat Consumption Fund – Series 1 is a close ended equity mutual fund scheme with a tenure of 1,300 days. The minimum application amount is Rs 5,000. The scheme will be available in cumulative (Growth) and dividend options. You can invest in ICICI Prudential Bharat Consumption Fund – Series 1 directly with ICICI Prudential AMC or through your Mutual Fund distributor.

Why India is and will be the most attractive consumption story in the world

  • India is one of the fastest growing large economies in the world. The growth story of India is fascinating. From the 1950s to 1980s, India was a planned economy and our GDP growth rate was low, less than 4% per annum (this was popularly known as the Hindu rate of growth). India’s GDP after around 40 years of Independence of $300 billion in 1990. In the next 20 years, India’s GDP grew to $1.4 trillion – nearly 4 times of what was achieved the first 40 years in half the time. India took around 60 years (since Independence) to enter the elite trillion dollar Gross Domestic Product club - it took only 8 years from 2007-08 to double the size by 2016. High GDP growth results in greater demand for goods and services.

  • India enjoys a huge demographic advantage compared to other economies. By 2020 more than half (50%) of our population will be below the age of 25, whereas in the US and China only around 31% of the population is below the age of 25. This demographic advantage can pay rich dividends since a large and growing (as children turn into adults) working population can accelerate our GDP growth. Growth in our working population has a direct relationship with growing consumption demand in India. Consumerism is growing in India and it is a trait, which is usually seen more in young people. A growing young population is therefore, positive for the consumption sectors.

  • The high rate of GDP growth and demographic advantage has resulted in significantly higher per capita income (GDP) over the last decade or so and will continue to grow at a fast clip in the future. Higher income will improve lifestyles of average Indians, resulting in higher consumptions.

  • Changes in the socio-cultural micro structure also have implications on consumer demand. Imagine a family comprising of aged parents, two sons, two daughter-in-laws and four grandchildren in the 1980s. Imagine they are sitting in their living room watching their favorite television serial or a cricket match on Doordarshan. This family of 10 members had just one TV and one ceiling fan or AC in their living room. But families are getting increasingly nuclear over the past two decades. The family of the same size as the joint family of the 80s is now likely to live in 3 separate homes, maybe in different cities. They will now have 3 TVs and 3 ACs, instead of one each in 80s. In this example the sales of the TV and AC manufacturers would have tripled due to separation of households.

    By 2025 nearly 75% of the families will be nuclear and will lead to accelerating consumption demand in India. There are other consumer behavior implications of the shift from joint families to nuclear families. In the joint families, the head of family was a key decisions maker, but in nuclear families the decision makers are younger and more enthusiastic towards consumption. Younger consumers are also more technology savvy. Digital influence on household consumption patterns is significant and growing rapidly.

Growth potential of different consumption sectors

  • Consumer Durables:

    The consumer durables market in India grew at 11% CAGR over the last 5 years or so and is projected to grow at 13% CAGR in the future. There is huge untapped market in this space – only 29% households own refrigerator, 11% households own washing machines, 6% household own computers etc. The TV industry is expected to grow at a CAGR of 15% over the next five years. The refrigerator market size is expected to grow at a CAGR of 12% over the next 5 years. Penetration of electrical fans in rural areas reaching 76 to 78% (from 65% in 2017) in the next two to three years will result in significant revenue growth for that business.

  • Automobiles:

    India has the 4th largest automobile industry in the world. We are the 7th largest commercial vehicle manufacturers in the world. As of FY 2015, 31% of the global sales of small cars were manufactured in India. We are also the world leaders in commercial 2 and 3 wheelers, low powered tractors and automotive components. Sales of cars, utility vehicles and vans grew at 8.85% during year 2017. The automotive sector contributes around 7% of India’s GDP currently (2017). By 2026, the automotive sector is expected to contribute more than 12% of India’s GDP, which implies that this sector will grow at 10 – 12% CAGR over the medium to long term.

  • FMCG:

    India is the 4th largest consumer non-durables market in the world – market size of $ 50 billion. It is further expected to grow at a 20.6 % CAGR to reach $ 103.7 billion by 2020. The rural market has huge potential in the FMCG sector – in FY 2017, the rural sector accounted for 60% of the FMCG market. FMCG products account for 50% of total rural spending. Rural consumer is getting more aspirational.

    The agricultural sector in a number of states has been facing financial distress over the last few years but despite the distress average household spend (both rural and urban) on FMCG increased from Rs 6,043 in 2015 to Rs 7,100 in 2017. This year’s Union Budget was primarily focused on improving rural income through rural oriented initiatives. With rising per capital income, especially in our rural economy, the FMCG sector is poised for significant growth in the near to medium term. FMCG sector is largely defensive and therefore, less susceptible to economic cycles.

  • Pharmaceuticals and Healthcare:

    This sector is growing at a tremendous pace due to strengthening coverage, services and increasing expenditure by public as well private players. During 2008-20, the market is expected to record a CAGR of 16.5%. The sector is also experiencing 22-25% growth in medical tourism and the industry is expected to double its size from $ 3 billion in April' 17 to $ 6 billion by end of 2018. Like FMCG, Pharmaceuticals and Healthcare are also defensive sectors.

  • Media and Entertainment:

    Media & Entertainment sector is expected to grow at a CAGR of 14.3% to touch $ 33.9 billion by 2020. Revenues from advertising are expected to grow at 15.9% to $ 14.91 billion. Events like IPL, T-20 World Cup (in 2020), Assembly and Loksabha elections etc. attract billion eye balls.

These are examples of the major sectors that are likely to benefit from growing consumption and per capita income in India; other sectors like power, telecom, hotels and resorts, financial services etc are also likely to benefit from growing consumption demand. Consumption is a very powerful investment theme and attractiveness of India relative to other emerging markets for foreign investors is based on our domestic consumption demand potential versus the export oriented economies of other emerging markets.

ICICI Prudential Bharat Consumption Fund – Series 1 Investment Strategy

  • The scheme will invest in sectors that can benefit from consumption theme like Consumer Non-Durable, Consumer Durable, Auto, Healthcare Services, etc. that are likely to play outwell with 3.5 years investment horizon (scheme tenure).

  • The fund managers will employ bottom-up stock selection approach with 3.5 years view.

  • The scheme will have the ability to reduce net equity risk at market peaks through asset allocation or hedging

  • The scheme will aim to limit downside of the portfolio by using hedging strategies

Conclusion

In this blog post, we discussed about the potential of consumption theme in India and why it may outperform the broader market. ICICI Prudential Bharat Consumption Fund – Series 1 is helmed by one of the best fund managers in the country. ICICI Prudential as AMC has an outstanding track record of performance across several mutual fund product categories. However, investors should note that this NFO is a close ended scheme and so they must be prepared to wait for 1,300 days from the date of allotment – there will be no liquidity, unless you invest through your demat account. Based on past evidence, even if you invest through your demat account, close ended mutual funds have limited liquidity. So you must be prepared to wait for the tenure of the scheme.

The consumption theme is very attractive and a number of consumption themed mutual fund schemes have performed well over the last few years. The track record of the fund managers and the AMC should inspire confidence in investors. However, you should invest in this fund based on your risk appetite and investment needs. Investors should consult with their financial advisors, if ICICI Prudential Bharat Consumption Fund – Series 1 is suitable for their investment needs.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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Dwaipayan Bose

Dwaipayan leads content production and mutual fund research in Advisorkhoj.com. He is actively involved in business development strategy, driving revenue growth and profitability, delivering superior customer satisfaction and talent development in Advisorkhoj. An alumnus of IIM Ahmedabad, Dwaipayan is a Finance and Consulting professional, with nearly 17 years of management and consulting experience in financial services domain across several geographies. In his previous corporate role, Dwaipayan was the Chief Financial Officer of American Express Global Business Services in India. He also co-founded a boutique consulting start-up to advice companies on business restructuring initiatives like private equity funding, mergers & acquisitions, divestitures, outsourcing and organizational restructuring. Dwaipayan has a strong track record of driving superior financial performance and developing talent in the organizations he has been involved with. He can be followed on his Twitter handle @DBadvisorkhoj.

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