Fund Focus: Sundaram Rural India Fund

The only fund that focuses solely on today's hottest theme

S. KrishnaKumar, CIO - Equity, Sundaram Mutual

7th May 2016

In a nutshell

Rural India is going through its worst crisis in recent history, and yet is seen by most fund managers as the hottest investment theme in India today.

Sundaram Rural India Fund is perhaps the only fund in the industry that focuses exclusively on the rural theme. Market interest in rural theme oriented stocks is propelling fund performance, as can be seen from near term performance data.

KrishnaKumar gives us a detailed perspective of each element of the rural theme, what's driving them and which sectors therefore within this broad theme appear most attractive.

He believes this fund ought to be in the satellite portion of every equity portfolio, even as you retain the core in diversified equity funds.

What do percentiles and their colours signify?

Fund performance is typically measured against benchmark (alpha) and against competition. Performance versus competition is measured through percentile scores - ie, what percentage of funds in the same category did this fund beat in the particular period?

If a fund's rank in a year was 6/25 it means that it stood 6th among a total of 25 funds in that category, in that period. This means 5 funds did better than this fund. In percentile terms, it stood at the 80th percentile - which means 20% of funds did better than this fund, in that particular period. If, in the next year, its rank was 11/26, it means 10 other funds out of a universe of 26 did better than this fund - or 38% of funds did better than this one. Its percentile score is therefore 62% - which signifies it beat 62% of competition.

Most fund managers aim to be in the top quartile (75 percentile or higher) while second quartile is also an acceptable outcome (beating 50 to 75% of competition). What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less than 50% of competition). Accordingly, we have given colour codes aligned with how fund houses see their own percentile scores. Green colour signifies top quartile (percentile score of 75 and above), yellow or amber signifies second quartile (percentile scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple visual inspection of colour codes can thus give you an idea of how often this fund has been in the top half of the table and how often it slips to the bottom half. A great fund performance is one which has only greens and yellows and no reds - admittedly a tall ask!

WF: This seems to be a fairly unique fund - are there others in the industry that are solely focused on the rural India theme?

KrishnaKumar: Sundaram Rural India Fund is the only fund in the industry investing wholly in the rural India theme.

WF: Rural India is going through a huge drought crisis at the moment and yet this is a theme that has caught the market's fancy. What are the key drivers of this theme?

KrishnaKumar: The last few years have been an existential challenge for rural India. 2015 and 2014 have seen an average rainfall deviation of 13% from normal and Food grain production has fallen by nearly 9% from FY14 levels. In addition to the monsoon deficit, government spends on Rural have also seen a drop. Sharp drops are witnessed in MNREGA, PMGSY and AAY.

However, Rural India is set to bounce back.

The key drivers are

1. IMD and Skymet forecasts are predicting above normal monsoons at 106% and 105% respectively

2. India has never had three failed monsoons in the last 100 years

3. Government has clearly signalled for increase in Rural spending to revive growth

4. Increased modes of financial inclusion will help bring down the cost of funding for people in rural areas

5. APMC reforms will help drive income growth on the farm side

6. Strong monsoon usually leads to rural prosperity as output increases and costs come down

7. With more money in their hands, there is a pick up in consumption and discretionary spending

8. Rural India to be a bigger beneficiary of implementation of the 7th Pay Commission and OROP as 53% of the government employees reside in Rurban India

9. With central and state governments looking to spend more on infrastructure, this could be a big driver for rural job creation

WF: Which sectors are you betting on within this theme and why?

KrishnaKumar:

1. Rural India set to move up the income and consumption curve

2. Consumer staples to be immediate beneficiaries

3. Durables to see the next leg of growth

4. Automobiles to see concurrent demand

5. Construction & Infra sectors to benefit from government spends

6. Financial Sector will be both the driver and the Beneficiary

7. Better rural economy increases growth prospects for banks and financiers

Preferred sectors in the fund as of March 31 are Banks, Consumer Non Durables and Automobiles

Banks and Financial Services

1. Financial sector growth in rural economy is also linked to monsoon

2. Tractor financial disbursement has a strong co-relation to rainfall trends

3. Priority sector lending (40% of Bank's credit offtake) which has slowed down over the last two years is expected to pick up

4. As demand for two wheelers picks up, lending to that segment will also benefit

5. Jan DhanYojana - 175 mn bank accounts have been opened

6. Direct Benefit transfer will lead to a more efficient system and more money in the hands of people

7. With DBT, the number of zero balance accounts has consistently come down

8. Payment banks will lead to better financial inclusion and easier flow of money from urban area to rural area

9. Expect an improvement in both asset and liability side for banks/ nbfcs with rural focus

Consumption

1. The shape of rural income distribution has changed significantly over the years

2. Studies suggest that the income category above middle income has risen to 52% from 17% in '96, in India

3. The Indian consumer basket is evolving gradually with a drop in the share of food in total consumption

4. Rising incomes across segments and the growing middle class would accelerate this growth into the future

5. Rural FMCG market had over taken urban in the last few years; however, it has slowed down recently

6. Premiumisation as a trend has moderated with slowdown in rural income

7. Earnings of Rural population is expected to improve with better produce, realisation and job opportunities

8. This should drive consumption of Staples as it has been impacted over the last year

9. DBT will help consumers spend more on FMCG products

10. Rural consumption is expected to grow at 18% CAGR for the next decade

11. As the income level grows spending on Non food items grows

12. Consumer Durables is one of the key beneficiaries

13. It is discretionary in nature and hence linked to income growth

Automobiles

1. Sale of Tractors is closely linked to the monsoon. Revival in demand is usually strong

2. Sales of Motorcycle and mopeds are also closely linked to Rural economy

3. Share of scooters in two-wheeler sales increased significantly over last few years as Rural economy slowed

WF: In terms of market cap allocation, would you describe it as multi-cap or more large cap focused? Is there a conscious strategy on market cap allocations?

KrishnaKumar: The fund will have a Multicap Portfolio with exposures to

1. Agri. automation aids like Tractors, Tillers, Harvesters, Planters

2. Agri. inputs - Fertilisers, Pesticides, Herbicides, Seeds>

3. Consumer staples / FMCG

4. Agri. output value chain

5. Dairy & Poultry

6. Sugar, Tea, Cotton

7. Consumer discretionary like Durables, Textile brands, Passenger vehicles, Entertainment

8. Building materials, Paints

9. Construction & Infrastructure sector

10. Micro-finance, Housing and Consumer / retail finance

WF: Your fund posted strong performance in 2015 and has made an impressive start in CY2016, with a top decile performance among diversified equity funds. What does your attribution analysis suggest as the key alpha generators in the last 15 months?

KrishnaKumar: Heritage Foods, HimatsingkaSeide, NavinFlurine, Bajaj Finance, M&M Financials were some of the ideas that generated alpha.

WF: Should rural India be seen as a tactical play now or does it have legs to stand on as a core portfolio holding?

KrishnaKumar: We would like to look at Rural thematic as an important part of the satellite holding of any portfolio. The core should remain diversified equity funds for investors in my view.

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