INCO - Columbia India Consumer ETF: Quality Doesn't Come Cheap But There Are Limits

2023-10-18 16:37:07 ET

Summary

• The Columbia India Consumer ETF offers exposure to around 30 Indian consumer companies.
• INCO's income facet is worth highlighting.
• We highlight some of the long-term and short-term tailwinds supporting this segment.
• The risk-reward on the charts is not ideal and the valuations are far too pricey for our liking.

ETF Profile

The Columbia India Consumer ETF ( INCO ), with a trading history of ~12 years, and $122m in AUM offers investors exposure to around 30 Indian consumer companies. These are essentially staple and discretionary stocks, with exposure to sub-terrains such as automobiles, food and beverages, media, retail, travel and entertainment, etc.

Garnering access to this fund is not a particularly cheap proposition with an expense ratio of 0.75%, around 11bps higher than the corresponding figure of the popular- iShares MSCI India ETF ( INDA ).

To counter the relatively steep expense ratio, INCO offers one tremendous edge, and that’s on the income front. Most Indian-based ETFs offer unremarkable yields, but INCO currently offers a whopping yield of close to 9% . And this is not really bumped up by a weak denominator price effect. Rather, if you track INCO’s yield history, you’d note that this is a product that has grown its dividends for five straight years, and at a remarkable CAGR of 185% across that duration!

We also appreciate the relative stability of this portfolio, as only 1 in 5 stocks typically get churned out every year.

Why INCO Should Be On Your Watchlist

So why should INCO interest you?

Well, there are both long-term and short-term tailwinds that raise INCO’s allure.

Firstly, the big picture takeaway is that if you want to be betting on the consumer theme, Asia is the place to be. Currently, the continent accounts for 55% of the global consumer class. In terms of spending, the dominance is less pronounced, but in less than 10 years, the continent could account for half of total global consumer spending,

Then within Asia, the two obvious candidates are China and India and we think the latter offers better prospects. India recently became the world’s most populous nation, and that in itself gives you a solid foundation to grow the consumer class. Well, by the end of this decade, the Brookings Institution expects the number of Indian consumers (those spending more than $11 per day on average, in PPP terms) to snowball at a much faster pace than China’s.

What also tilts things in India’s favor is that its consumer class is a lot younger than China’s. Conversely, China's main spending segment consists of those in the retirement bracket; interestingly enough, to counter the ills associated with this scenario, the country is looking to increase its retirement age.

In the short term, it's fair to say that the Indian consumer is in a fairly resilient state. The RBI's bi-monthly consumer confidence survey provides some context on the general economic conditions and employment situation, and the current index is at 4-month highs. Crucially, even the forward-looking future expectation index hit 4-month highs.

Indian consumers are likely feeling more emboldened as they enter the most festive period of the year (Diwali and Dussehra are around the corner). Do consider that INCO is heavily tilted to the auto segment ( 30% of the portfolio), and this segment is currently on fire with a record amount of vehicles being sold in September alone as dealerships seek to build inventories. We think that it also speaks to the relative prosperity of the Indian populace, that the high-ticket SUVs are dominating the sales charts over entry-level cars (reportedly 60% of the overall auto sales mix comes from SUVs).

The consumer class too will feel relatively assuaged by the fact that India’s retail inflation has now dropped to 5%, within the RBI’s target range of 4-6%. As things stand, the central bank has kept policy rates steady, but by the end of FY24 (India follows a March year-end) the bank could start cutting rates as well, providing another fillip to the consumer class.

Technical And Valuation Commentary

Whilst gauging INCO’s charts we are not best pleased to discover the current risk-reward on offer. The first chart below captures INCO’s long-term price imprints on a monthly basis. What’s evident is that INCO has steadily crept up over time, but its price imprints have taken place within a certain ascending channel. If one were to pursue a long position at the current price point and use the two boundaries of the channel as pivot zones, you only get a reward-to-risk ratio of roughly 0.5x. For perspective, its preferable to kickstart long positions when the reward to risk is over 1x.

Separately investors may also be interested to note that INCO has begun to attract the attention of the short-selling community, with the short interest currently at 3% .

Then, one may also ponder if these Indian consumer stocks are best placed to benefit from rotational momentum within the overall India package, as represented by the INDA ETF. Well, that looks unlikely as INCO’s relative strength versus INDA has once again climbed up to rather elevated levels. That was not quite the case in August 2022 when the ratio had mean-reverted to the mid-point of its long-term range.

Ultimately, the variable that really dampens the long case for INCO is its sky-high valuations. Indian equities are almost always pricey, but INCO takes things to a different level altogether. Data from Morningstar shows that our focus ETF is priced at an enormous P/E of 45x ; in contrast, the popular INDA ETF can be picked up at a discount of 55% . One could perhaps reluctantly make some allowances for INCO’s valuations if its holdings were poised to generate superlative earnings growth over time. However, note that you’ll get long-term earnings growth of 14% p.a., which is only around 200bps more than what INDA will likely deliver (Source: Morningstar).

Closing Thoughts

To close, we like the consumer story of India, and we also think the income angle is truly special. However, we’re not moved by the current risk-reward on the charts, and we’re also certainly put off by the valuations of this product. INCO is a HOLD.

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