Nippon India Multi Cap Fund delivered a healthy return under CIO S R Bhan

Nippon India Multi Cap Fund delivered a double-digit return even as the broader markets struggled to stay in positive territory

In a year when large, medium and small-cap companies were struggling to generate returns beyond the low single digits, Nippon India Multi Cap Fund posted a healthy 14.12 per cent gain. Even on a three-year basis, the scheme managed by Sailesh Raj Bhan delivered compounded annual growth of 19.35 per cent in net asset value.

The strong showing over the last three years helped Bhan, who is the CIO – Equity Investments, Nippon India Mutual Fund, win the Business Standard Fund Manager of the Year 2022 award in the Flexi Cap Equity category. Flexi-cap mutual funds are open-ended equity schemes which invest in companies across market capitalisations.

Bhan, who has been managing this fund for the past 18 years, says that positioning key investment bets three to four years ago set him up nicely to take advantage of the low valuations across sectors and companies during the Covid-19 pandemic. Markets had become narrow; some companies fetched very high valuations while others were unwanted.

Citing the example of engineering, hotels, corporate banks and retail, he notes that key companies in these sectors were down by up to 40 per cent. For example, the entire industrial pack was available at valuations of the largest listed consumer company. Some assets in segments such as hotels and engineering were difficult to replace, and it was a matter of time before they bounced back as the economic recovery took shape.

Most engineering names in Bhan’s portfolio are either strong multinationals with large product portfolios and a technological edge, or market leaders — Linde India, Cummins India, Siemens, ABB, Schneider Electric, GE T&D, Honeywell Automation, Vesuvius India, or Indian market leaders such as Larsen & Toubro (L&T). These firms run highly capable businesses, and were available at reasonable valuations.

Most of them are cash-rich, have a strong balance sheet and could fund their operations without having to keep taking on debt. Given the cyclical nature of the businesses, there was a need for a slightly longer horizon to benefit from the recovery. The idea is to own the top two or three players who can withstand slowdowns and even add market share, as smaller players increasingly struggle with access to capital.

Another value play was corporate lenders compared with retail lenders. “When you buy a sustainable business, valuation is the single most important criteria for us; we will not overpay for growth but buy growth plays at sensible prices,” says Bhan.

Among the top eight stocks by portfolio weight, hotels (Indian Hotels, EIH), engineering and industrials (Linde India, L&T, Kennametal India) and financials (Axis Bank, ICICI Bank and HDFC Bank) are prominent. Among the stocks that are up at least 80 per cent over the past year are Shoppers Stop, Vesuvius India, Mahindra CIE and ITC.

The sharp post-pandemic recovery in the services sector (hotels, retail and quick service restaurants) also helped boost the performance of the fund. The fact that most of its peers were transitioning from large-cap to flexi-cap (Nippon had a diversified exposure which included mid- and small-cap) added to the fund’s performance edge.

Effective January 2021, the market regulator made it mandatory for multi-cap funds to invest at least 75 per cent of their total assets in equity and equity-related securities, with a minimum of 25 per cent exposure to equity and equity-related securities in large, medium and small-cap companies. This was done because most multi-cap funds had turned into large-cap-focused funds.

Bhan believes that most new-age stocks, which are in vogue given large cash injections, were untested and the possibilities were exaggerated, hence the need to look at them more objectively and remove the hype. Instead, the focus was on sustainable growth businesses available at reasonable valuations, where the competition is receding and where the unit economics is favourable. While the idea is to capture some emerging new-age segments too, these businesses should be available at a reasonable price, says Bhan.