The consumption sector has been consistently delivering on the earnings growth front. With the growth drivers for the consumption theme already visible, it is relatively less risky in the times of uncertainties. ICICI Prudential Bharat Consumption Fund aims to make the most of this in its latest closed end fund offer. Sankaran Naren CIO ICICI Pru Mutual tells us why consumption present opportunities now.
What are the driving factors behind choosing consumption as an investment theme now?
India with its 1.3 billion plus population enjoys a demographic advantage with its working-age population over 50%. The per capita income has also seen significant growth in last decade and touched the levels of approx. US$ 1,700 in 2017. The consumption patterns of Indian households are also changing in line with the evolving technology and the digital influence on broader consumer spending is growing at encouraging pace. Further, with the penetration of mobile telephony, rural consumption pattern is converging with the urban consumption. With the growth drivers for the consumption theme already visible, it is relatively less risky in the times of uncertainties. Also, since it is a pre-election phase, we would prefer rural consumption theme over urban consumption.
What are the key segments in consumption where opportunities lie now?
As far as the consumption theme is concerned, it offers you a plethora of wealth creation opportunities. We believe Consumer Non-Durable, Auto, Pharma & Healthcare, Consumer Electrical/ Home Appliances, and Power are some of the key segments where the opportunity lies.
In terms of the opportunity size, Consumer Durable/light electrical market in India is expected to grow at 13% CAGR and reach Rs. 3 trillion (US$ 46.54 bn) by FY 2020. When it comes to auto, the sector is likely to contribute in excess of 12% of India’s GDP as per Auto Motive Mission Plan 2016-26. Media & Entertainment sector is expected to grow at a CAGR of 14.3% to touch US$ 33.9 bn by 2020.Consumer Non-Durable space is likely to grow at a CAGR of 20.6 % to reach US$ 103.7 bn by 2020.
Stocks in the consumption space have mostly remained high on valuations. Are there not other opportunities outside this theme at lower valuations?
The stocks in this space have showcased a steady earnings growth over the last 6-7 years, barring few instances of misses on account of exceptional issues. As such, the consumption sector has been consistently delivering on the earnings growth front. While we do not rule out other opportunities outside this theme, the advantage with the consumption theme is that it offers a diversified range of sectors to invest in. It offers you a set of defensive sectors like consumer staples and healthcare, underperforming sectors on account of macro issues like telecom and power coupled with stock-specific opportunities that are available in sectors like media and entertainment. There is a mandate to invest 80% of the portfolio in consumption theme, and rest can be in other opportunities outside this theme.
Between rural and urban consumption where would you be more positive?
Union Budget 2018 had a specific focus on strengthening agriculture and rural economy. Further, as we move closer to the Union elections due next year, rural consumption may continue to stay a preferred theme over urban consumption. Further, rural consumption has not participated in the recent rally witnessed in the equity markets. As such, we stay positive on the sector as a catch-up rally in this pocket is overdue.
What will be the strategy of ICICI Pru’s Bharat Consumption fund? Can it be expected to also contain volatility better than the broad market?
ICICI Prudential Bharat Consumption Fund will invest predominantly in equity and equity related instruments of sectors that could benefit from growth in consumption and related activities. Further, the fund will seek to limit the portfolio downside by using suitable hedging strategies.
Will investors not be subject to timing risk by locking into the fund?
We have long believed that close-ended funds with dividend option are the way to invest for people. It is a myth that people time the markets accurately. If you are the person who has timed the market in the past by investing in midcaps in 2011, taking out money from equities in 2007, and investing in equities in 2009 January, then a close-ended fund for such a person is not required. However, most investors are unable to do this deftly which is why it is suitable to invest through SIPs and close-ended funds.