5 Equity Mutual Funds Take Flight with Drone Stocks

September 5, 2023 Mutual Fund

In the last few years with the government’s emphasis on Aatmanirbharta (or self-reliance) and the ‘Make in India’, initiative, many investment themes have taken shape. One such theme is drones.

The Modi-led-NDA government has taken a series of reform measures to provide an impetus to India’s upcoming Drone industry, such as:

• Regulatory framework for commercial use of drones.
• Production-Linked Incentive (PLI) scheme to promote the growth of drone manufacturing by private companies.
• Drone certification scheme, making it easier to obtain type certificates by drone manufacturers.
• Abolished the requirement for a drone pilot license.
• Opened up nearly 90% of Indian airspace as a green zone for drones flying up to 400 feet.

Further, the Ministry of Civil Aviation has proactively engaged with various Union Ministries and State/UT Governments across the country to promote drone applications.

After the internet and GPS technology, drones are likely to transform the Indian market space.

Today, the use of drones — also known as Unmanned Aeriel Vehicles (UAV) — is not just limited to defence purposes, but is also widely adopted in large-scale mapping, surveillance, monitoring construction activity, used on oil & gas fields, commercial logistics, wildlife conservation, entertainment & information broadcasting, healthcare (for vaccine deliveries), agriculture (for soil health scan, spreading seeds, pollination, and spraying fertilizers), warehouse inventory management, mining, and more!

So, there are many end users of drones. Drone Training Schools have also been set up in various States that have the potential to be a game changer in the promotion and development of drone applications.

Realising the potential of the sector, several companies are taking an interest and are now involved in the drone business in some way or another.

Mukesh Ambani’s Reliance Strategic Business Ventures Limited (a subsidiary of Reliance Industries Limited) was the foremost entrant in drone space in 2019 with an acquisition of a 51.78% stake in Asteria Aerospace (Bengaluru-based) for Rs 23.12 crore.

Last year, in May 2022, Adani Defence Systems and Technologies Limited, the wholly owned subsidiary of Adani Enterprises, picked a 50% stake in General Aeronautics (Bengaluru-based) for an undisclosed amount. This was done to leverage its own military drones, plus artificial intelligence (AI) and machine learning (ML) capabilities for extending work into the domestic agricultural sector.

Many other players, too, have acquired stakes in drone companies:

• RattanIndia Enterprises (through its wholly owned subsidiary, Neosky India Limited): 60% stake (for an undisclosed amount) in Throttle Aerospace System (Bangaluru-based)
• DCM Shriram: 30% stake (for USD 1 million) in Zyrone Dynamics (a Turkish company)
• Zomato: acquired TechEagle Innovations (a Lucknow-based tech start-up) for an undisclosed amount
• Infosys (through its Innovation Fund) around 4% stake (six years ago for an undisclosed amount) in Idea Forge (an erstwhile start-up, now a listed company)

It is estimated that the annual sale turnover of the Indian drone manufacturing industry may grow from approximately Rs 60 crore in 2020-21 to around Rs 900 crore by 2024-25, with the implementation of the PLI scheme.

Backed by innovation, information technology, state-of-the-art engineering and its huge domestic demand, India has the potential to become a global drone hub.

If you wish to benefit from India’s drone revolution, it possibly makes sense to have exposure to companies involved in the drone sector. These include the sones manufacturing drones and those provide the components and technology to manufacture them.

The technologies that are backing drones are 5G communication network, cloud computing, advanced processing chips, powerful sensors, navigation systems, cameras, propellers, hydrogen fuel cells, batteries, motors, mixed reality (AI, AR, and XR), airframes, electricals (cables and connectors), and more!

Some of the Indian companies involved (directly or indirectly) in the drone space as per the Equitymaster stock screener are:

1) Adani Enterprises

2) Bharat Electronics

3) Bharat Forge

4) Droneacharya Aerial Innovations

5) DCM Shriram

6) Dhanuka Agritech

7) Hindustan Aeronautics

8) Info Edge India

9) Idea Forge Technologies

10) Infosys

11) L&T

12) Para Defence & Space Tech

13) Rattanindia Enterprises

14) Reliance Industries

15) Zen Technologies

16) Zomato

Other than these, there are several start-ups — which are a link between the academia and industry — that are in the drone space, such as Garuda Aerospace (Chennai-based), Skylark Drones (Bangaluru-based), Aarava Unmanned Systems, Dhaksha Unmanned Systems (Chennai-based), Raphe mPhibr (Noida -based), Kinetix (Bangaluru-based) etc. As per Trancx, currently, there are 365 drone start-ups in India, and many have been funded well.

But as an investor, you need to ensure that companies involved (directly or indirectly) in the drone space are generating consistent revenues, have positive cash flow and have the potential to make profits.

The corporate earnings of drone companies have been mixed. Meaning, not all have clocked met the street expectations.

It’s not an easy task to invest directly in drone stocks. Different companies address different segments of drone utility. It is important to identify those carefully studying the macro trends and industry undercurrents.

Given that, it would be sensible to invest in equity mutual fund schemes that have a decent exposure to drone stocks. Doing so shall facilitate diversification and reduce the risk of investing in a single stock.

Currently, the top mutual fund house betting in the drone space (directly or indirectly) are SBI Mutual Fund, ICICI Prudential Mutual Fund, HDFC Mutual Fund, Nippon India Mutual Fund, and Kotak Mutual Fund (see Table 1).

Table 1: Top 5 Mutual Fund Houses with Exposure to Drone Stocks

Portfolio data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

SBI Mutual Fund, which has high exposure, has exposure to drone companies (directly or indirectly) in its schemes, such as SBI Bluechip Fund, SBI Flexicap Fund, SBI Long Term Equity Fund (ELSS), SBI Large & Midcap Fund, and SBI Technology Opportunity Fund. Many of these schemes are among the top performers in the respective sub-categories of equity mutual funds.

Among all diversified and sector & thematic funds, 412 schemes have exposure drone stocks comprising 9.40% of their equity AUM.

In value terms, over Rs 1,70,835 crore is invested in drone companies (directly or indirectly) by equity mutual funds.

Speaking of the top 5 equity mutual fund schemes having high exposure to drone stocks are ICICI Pru Bluechip Fund, Kotak Flexicap Fund, Mirae Asset Large Cap Fund, SBI BlueChip Fund, and Axis Bluechip Fund.

So, many largecap mutual funds have exposure to drone companies directly or indirectly.

Table 2: Top 5 Equity Mutual Fund Schemes with Exposure to Drone Stocks

Portfolio data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

Let’s understand the portfolio traits of these schemes in a bit more detail….

#1: ICICI Pru Bluechip Fund

Launched in May 2008, ICICI Pru Bluechip Fund manages assets worth Rs 40,286 crore as per its portfolio as of July 2023.

The fund focuses on investing in the top 100 companies listed on the National Stock Exchange (NSE). In other words, it is a largecap equity mutual fund scheme with a mandate to invest a minimum of 80% of the portfolio in equity & equity-related instruments of large-cap companies.

Thus, its investment objective is to generate long-term capital appreciation and income distribution to investors from a portfolio that is predominantly invested in equity and equity-related securities of large-cap companies.

Such companies are established players, have robust business models, command very respectable market share, have a proven track record, usually can fund their growth, are highly liquid (traded frequently on the stock exchanges), and are less volatile. They are capable enough to deliver long-term consistent returns.

ICICI Pru Bluechip Fund for its portfolio construction fund follows a bottom-up approach of stock picking. It shortlists companies on their merits. It follows a process-based investment strategy to pick largecap stocks without any sector bias and identifies bargain stocks with promising potential for long-term growth.

For picking stocks, the fund managers look for the scalability of the company they are considering buying and give high weightage to the management track record and scope of improving profitability. While the fund pursues a growth style of investing, it has shown some flair towards value as well.

ICICI Pru Bluechip Fund is currently holding a well-diversified portfolio of around 70 stocks in line with its investment mandate. Its exposure to midcap and smallcaps is just around 6%. The top stocks are around 55% of the portfolio, and the fund typically follows a buy-and-hold strategy.

Table 3: Top drone stocks held by ICICI Pru Bluechip Fund

Portfolio data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

Reliance Industries, L&T, and Infosys are among the top 10 holdings that are directly or indirectly involved in the drone business.

#2: Kotak Flexi Cap Fund

Launched in September 2009 as Kotak Standard Multicap Fund, effective February 2021, the fundamental attributes were changed, and the scheme was rechristened as Kotak Flexi Cap Fund.

Under Flexi Cap funds, the scheme is positioned as an open-ended dynamic equity scheme investing across largecap, midcap, and smallcap stocks in any proportion/flexibility.

The investment objective of the scheme is to generate long-term capital appreciation from a portfolio of equity and equity-related securities, generally focused on a few selected sectors.

The scheme pursues growth at a reasonable price (GARP) and uses a combination of top-down and bottom-up approach to stock picking.

Some of the critical aspects it looks for its portfolio construction are:

• Scalable and competitive business models
• Strong management
• Efficient allocation of capital
• Steady cash-flow generation
• And valuation comfort

Its portfolio comprises both cyclical and non-cyclical stocks, reforms dependent & independent ones, and consumption and investment driven, among others.

Currently, around 77% of the portfolio is held in largecaps, 23% in midcaps and 0.5% in smallcaps. Kotak Flexi Cap Fund holds a well-diversified portfolio of around 50 stocks, wherein the top 10 stock constitutes around 49% — which is a bit concentrated.

Table 4: Top drone stocks held by Kotak Flexi Cap Fund

The list is not exhaustive.
Data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The drone companies that it has exposure to (directly or indirectly) are L&T, Infosys, Bharat Electronics, Reliance Industries, and others. These are among the top 10 holdings of the fund.

#3: Mirae Asset Large Cap Fund

Launched in April 2008, this scheme has an AUM of over Rs 35,500 crore as per its portfolio as of July 31, 2023.

Mirae Asset Large Cap Fund is mandated to invest at least 80% of its assets in largecap stocks.

Largecaps, as you may know, are the first 100 companies on market capitalisation. These companies are well-established names, have a very respectable market share, and are relatively safer than mid and smallcap companies.

In line with its investment mandate, the objective of the scheme is to generate long-term capital appreciation by capitalising on potential investment opportunities by predominantly investing in equities of large-cap companies.

But while holding a largecap biased portfolio, Mirae Asset Large Cap Fund invests across sectors and themes.

The investment approach is centred around participating in high-quality businesses up to a reasonable price — companies that have a sustainable competitive advantage, strong pricing power and sector leaders.

The fund seeks to identify profitable growth-oriented businesses run by competent management. In doing so, it considers valuations for the risk-reward matrix. Moreover, it also invests in turnaround stories and cyclical stocks.

For its portfolio construction, Mirae Asset Large Cap Fund follows a combination of the top-down and bottom-up approach. It holds the stocks with conviction for an extended period.

At present, Mirae Asset Large Cap Fund holds a well-diversified portfolio of around 60-65 stocks, wherein nearly 85% is held in largecaps, and the remaining in midcap and smallcap stocks. The top 10 stocks constitute around 57% of the portfolio.

Table 5: Top drone stocks held by Mirae Asset Large Cap Fund

The list is not exhaustive.
Data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

Directly or indirectly, Mirae Asset Large Cap Fund has exposure to companies in the drone space, such as Reliance Industries, Infosys, L&T, Zomato, and Bharat Electronics. In the table above, the first three are among the top 10 holdings of the fund.

#4: SBI Bluechip Fund

Launched in January 2006, SBI Bluechip Fund has the mandate to invest at least 80% of its assets in a diversified basket of largecap stocks.

It is the second largest scheme in the largecap category with an AUM of over Rs 39,000 crore. SBI Bluechip Fund actively manages its portfolio with a blend of growth and value style, aiming to provide its investors with opportunities for long-term capital growth.

While the fund’s portfolio remains biased towards large-caps, it does make opportunistic allocations to mid-caps, but within the mandated limit.

That said, SBI Bluechip Fund prefers to stay away from momentum-driven bets, which could result in underperformance in the short term.

For its stock picking, the fund pursues a top-down and bottom-up approach and aims to invest in companies with…

• Established brand presence
• Predominantly the market leaders in the industry with less uncertain top-line and bottom-line growth
• Solid brand equity
• And good reputation

In this endeavour, the investment team also aims to keep an eye on consistency in management performance, change in leadership, and key management decisions that can affect the outlook of the business.

SBI Bluechip Fund usually holds around 50 stocks in its portfolio and holds them with conviction following a buy-and-hold strategy.

Table 6: Top drone stocks held by SBI Bluechip Fund

The list is not exhaustive.
Data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The companies in the drone space it has exposure to (directly or indirectly) are Infosys, L&T, Reliance Industries, and Zomato. Notably, the first three are part of SBI Bluechip Fund’s top 10 holdings.

#5: Axis Bluechip Fund

This scheme was launched in January 2010 and currently has an AUM of around Rs 33,800 crore as per its portfolio as of July 2023.

Like many of its largecap peers, it has a mandate of investing at least 80% of its assets in largecap stocks (the first 100 on market capitalisation).

In line with that, the investment objective of Axis Bluechip Fund is to achieve long-term capital appreciation by investing in a diversified portfolio predominantly consisting of equity and equity-related securities of largecap companies including derivatives.

For its portfolio construction, Axis Bluechip Fund follows a bottom-up approach focusing on the appreciation potential of individual stocks considering their fundamentals.

Axis Mutual Fund employs a ‘Fair value’ based research process to analyse the appreciation potential of each stock in its universe. Fair value is a measure of the intrinsic worth of a company. The universe of stocks is carefully selected to include companies that have robust business models and enjoy sustainable competitive advantages as compared to their competitors.

Unlike many of its peers, Axis Bluechip Fund holds a compact portfolio of around 40-45 stocks. It invests only in largecap stocks and has zero allocation to mid and smallcap stocks. Currently, the top 10 stocks comprise nearly 58% of the portfolio.

Table 7: Top drone stocks held by Axis Bluechip Fund

The list is not exhaustive.
Data as of July 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The fund has direct or indirect exposure to companies involved in drone space, such as Reliance Industries, Infosys, L&T, and Info Edge. The first three in the table above are among the top 10 holdings.

How have the top 5 mutual fund schemes betting drones performed?

The top 5 equity mutual fund scheme exposures to drone stocks (directly or indirectly) have fared well vis-à-vis the S&P BSE Sensex -TRI and Nifty 50 -TRI.

Table 8: Performance of top 5 equity mutual fund schemes betting on drone stocks

Data as of September 1, 2023
The list is not exhaustive.
The securities quoted are for illustration only and are not recommendatory.
Direct Plan-Growth option considered.
Returns considered are point-to-point and expressed in %.
Returns over 1 year are compounded annualised; else absolute.
Standard Deviation indicates Total Risk, while Sharpe and Sortino Ratios measure the Risk-Adjusted Return. They are calculated over a 3-Yr period assuming a risk-free rate of 6% p.a
Past performance is not an indicator of future returns.
The table above is NOT a recommendation as such. Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
(Source: ACE MF; Data collated by PersonalFN Research) 

The positive performance of not just the companies involved in the drone business (directly or indirectly) but also the companies from other sectors have enabled the aforementioned schemes to deliver appealing returns.

ICICI Pru Bluechip Fund, SBI Bluechip Fund, and Mirae Asset Large Cap Fund are among the top-performing or best largecap equity mutual fund schemes that have decently rewarded their investors against the risk taken.

Axis Bluechip Fund has been struggling with its performance for the past couple of years and has significantly trailed the benchmark and most of its peers by a noticeable margin. Though the performance of the scheme over the long-term period of 5 years and 7 years is still reasonable, ABF has disappointed on risk-reward parameters.

Kotak Flexicap Fund has also trailed its peers in the flexi-cap funds category. Thus, the slump in returns has severely impacted the risk-adjusted returns of the fund.

[Read: Best Flexi Cap Mutual Funds to Invest in 2023 – Top Performing Flexi Cap Mutual Funds in India]

Outlook for the Drone Sector in India

The government currently utilising services of Drone service providers for vaccine delivery, inspection of oil pipelines and power transmission lines, anti-locust operations, agricultural spraying, survey of mines, land mapping under SWAMITVA (Survey of Villages Abadi and Mapping with Improvised Technology in Village Areas) scheme for issuance of digital property cards, etc.

In time to come, drones are likely to find many more applications. From a few companies in the drone space at present, the list is likely to expand in time.

The drone market would report exponential growth — become a multi-billion-dollar industry — in the coming decade — and India could become the global hub for drones backed by reforms, investment and innovation in this space By notifying the Drone Rules 2021 and PLI scheme for drone manufacturing the government has already paved the growth path for drones. An EY – FICCI report titled, “Making India the drone hub of the world” sees drone and its component industry significantly strengthen India’s manufacturing potential to USD 32 billion by 2030. This, in turn, is expected to contribute to India’s ambition of becoming a USD 5 trillion-dollar economy.

Drone technology is a sunrise sector and is expected to boom. But as EY – FICCI in the report righty mentions, it is important for the government to continue playing a market-making role — be it license issuances and simplifying for drone demonstrations abroad — so that enough demand is generated for drone technology.

For you, the investor, to make the most of the opportunity in the drone space, invest sensibly (by understanding the macro and micro factors) and avoid taking unwarranted risks. Keep in mind, undesirable regulatory changes (if any), privacy concerns, security concerns, air space restrictions, and supply chain disruption, among other factors that could weigh on the growth of companies in the drone space.

Hence be smart, yet a thoughtful investor.

Happy Investing!

This article first appeared on PersonalFN here