FundsIndia Reviews: NFO of Birla Sun Life Manufacturing Equity Fund

If one assumes that FY-14 was the low point for GDP growth and a domestic recovery in demand is only to be expected, then the  fall out of such an event would be improved utilisation rates and higher operating leverage for companies.

If so, companies engaged in manufacturing activities would be the ones to benefit the most from the above. This, together with the ‘Make in India’ thrust by the Government of India, appears to be the premise for the new fund offer from Birla Sun Life Mutual Fund.

About the fund

Birla Sun Life Manufacturing Equity Fund, an open-ended equity scheme that will invest in stocks from the manufacturing sector, is on offer from January 13. The fund will have a universe of over 22 sectors.

At least 240 companies in the S&P BSE 500 index alone are engaged in manufacturing activities that range from engineering, capital goods, consumer goods, pharma, automobile, textiles, electronics and so on. Such segments would broadly be the universe for the fund to invest in.

Manufacturing revival

There are a few factors that buttress a case for revival in the manufacturing space at this point in time. One, some of the key areas that the present government is focusing on – infrastructure, railways, defence and smart cities – all provide tremendous scope for demand/orders for the manufacturing space.

Two, besides government spending in these areas, some of the key reforms – be it labour law or land acquisition, GST implementation, farm sector reforms, market linked pricing for petro products or opening up of FDI in key areas – all translate into ease of doing business and attract higher investment activity primarily in the manufacturing sectors.

The above two are directed towards ultimately achieving the government’s vision of 100 million jobs in the manufacturing space and ramping up the share of manufacturing in GDP to 25% by 2022. And so the campaign of Make in India!

Three and a more important point to note is that the manufacturing space would be among the biggest beneficiary of a fall in interest rate, when it happens. Lower cost of capital, besides reviving corporate capex, can significantly boost earnings for companies in manufacturing activities. This has been seen in earlier cycles as well, in sectors such as capital goods, auto ancillaries and cement to name a few.

Added to this, with what seems to be a the beginning of a prolonged slowdown in many commodities that are inputs to the above sectors, margin expansion at an operating level provides scope for superior earnings quality and hence a possible re-rating for companies that benefit from such lower commodity costs.

Balanced with cyclical and defensives

Typically the term manufacturing is associated with capital goods, engineering or auto and auto ancillary companies – which are mostly cyclical sectors – that is sectors whose revenues are highly sensitive to business cycles However, the theme for Birla Manufacturing Equity appears to be a broader one, going by the 22 sectors or so that qualify in its universe.

That means while it would have a good number of cyclical sectors, relatively defensive plays within the manufacturing space, such as FMCG or pharma, could provide a good balance and complement the cyclical sectors well in times of turbulence.

This is why the returns still stack up well when seen across time frames. The graphic below shows the returns of manufacturing company stocks in the S&P BSE 500 index.

Suitability

Birla Sun Life Manufacturing Equity Fund is suitable for long-term investors who can take on risks. As a growth theme, the fortunes of the manufacturing space are largely dependent on economic revival.

Investors need to note that they will not get any noteworthy exposure to sectors such as IT and other ‘service-oriented’ industries in this fund. Banking and financial services too will not be part of the primary allocation and may at best be come in as part of a 20% leeway that the fund has to invest outside manufacturing companies.

The fund will be benchmarked against the S&P BSE 500 which has higher weight to the financial space. Hence, the fund will have to work hard to beat the benchmark. In a favourable growth phase, though, manufacturing space has beat broad indices comfortably.

The fund will be managed by Anil Shah who currently manages funds such as Birla Sun Life Equity, Birla Sun Life India GenNext and Birla Sun Life Special Situations. The NFO will close on January 27 and reopen for further subscriptions within 5 working days of allotment.

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