Time for mutual funds to tap the water theme

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Last month, India’s IT city Bengaluru caught the attention of the nation due to its acute water shortage problem, as queues to procure water extended over many miles. As the scarcity was expansive, the Karnataka government even banned the use of drinking water for non-essential purposes — such as car washing, gardening, construction, water fountains and road construction and maintenance. The Bangalore Water Supply and Sewerage Board (BWSSB) had levied a fine of ₹5,000 for any violations of the order, in a bid to mitigate the situation.

This problem was not just Bengaluru-centric. Cities across Kerala, Telangana, Tamil Nadu and Andhra Pradesh too faced water stress.

A NITI Aayog report, in 2018, predicted that 21 Indian cities — including Delhi, Bengaluru, Hyderabad, Mumbai, and Chennai, the largest urban centres in India — will run out of groundwater by 2030, affecting 100 million people, leaving 40 per cent of the country’s population without access to drinking water.

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Similarly, a ‘United Nations World Water Development Report 2023: partnerships and cooperation for water’, said India is expected to be the most severely affected as the global urban population facing water scarcity is projected to increase from 933 million in 2016 to 1.7-2.4 billion people in 2050.

Water net neutrality

Amid these reports, NITI Aayog is working on a framework for water net neutrality, especially for Industrial segment, by 2030-35. It will also enable industries to offset their water consumption by purchasing credits to be invested in water efficiency efforts and extended clean water availability. “As India races towards a $5-trillion economy, the Indian Government’s focus is on several key initiatives aimed at safeguarding water availability and promoting sustainable management practices,” said Prabhudas Lilladher in a recent report.

Prabhudas Lilladher has estimated India’s water infrastructure or water treatment chemical market to be valued at $2.8 billion by 2025. India’s water treatment chemicals market has been valued at $1.70 billion in 2022 and is anticipated to project robust growth with a CAGR of 7.52 per cent through 2025.

Few water-based funds

The water infrastructure industry is segmented into various categories of water treatment chemicals, including coagulants and flocculants, corrosion and scale inhibitors, biocides and disinfectants, pH adjusters, chelating agents, and others. Each segment addresses specific water treatment challenges and requirements. The Indian plastic pipe market is expected to grow at a CAGR of 10.3 per cent from 2022 to 2027, reaching an estimated value of $10.9 billion, it further said.

These initiatives, no doubt, are likely to benefit companies that cater to these segments, such as L&T, Va Tech Wabag, EMS, Ion Exchange, Skipper, Felix Industries, KSB Pumps, WPIL, Thermax, Voltas, De Nora, Aarti Industries, Welspun Corp, Astral Pipes. etc.

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According to MorningStar, there are just 11 water-focused funds domiciled in the US, with a combined $6.3 billion in assets under management. However, the situation in India is even more pathetic.

Only, Baroda BNP Paribas has a scheme based on water theme: Aqua Fund of Fund. Even this fund invests in BNP Paribas Funds Aqua (Lux), a sub-fund of the SICAV BNP Paribas Funds that invests in global water value chain companies such as American Water Works, Veolia Environ, Linde Plc, Severn Trent Plc and Idex Corp. It currently manages about ₹67.5 crore assets and produces a one-year return of 17.69 per cent and a CAGR of 7.44 per cent since inception (May 2021).

As it would be difficult for individuals to evaluate each of these companies as they possess unique risks, it would be better for mutual funds to launch products based on the theme, especially on India-focussed stocks that will benefit from domestic economic activity.