Centre's fiscal flexibility sparks optimism: 3P Founder & CIO Prashant Jain

Jain delves into how the fund is striving to stand out in a competitive market landscape

After spending nearly two decades at HDFC Mutual Fund (MF), celebrated fund manager PRASHANT JAIN made a bold move in 2022 by quitting to establish his fund under the alternative investment fund setup, targeting wealthy investors. His brainchild, the 3P India Equity Fund, recently marked its one-year anniversary, boasting an impressive achievement of scaling its assets under management (AUM) to Rs 11,000 crore. The fund has outperformed the benchmark National Stock Exchange Nifty returns by over 20 percentage points. In an interview with Samie Modak in Mumbai, Jain, the founder and chief investment officer at 3P, delves into how the fund is striving to stand out in a competitive market landscape. Edited excerpts:

The markets experienced a roller coaster ride last week. Can we expect stability moving forward?
 

Following the June 4 crash, it’s likely that many weak hands exited the market. However, volatility is expected to subside. We are optimistic about the government’s ability to increase spending selectively. Despite this, robust growth persists, bolstered by the government’s asset-rich position, driven by the growth in market capitalisation of public sector undertakings (PSUs) and dividends from the Reserve Bank of India. It’s worth noting that expanding fiscal deficit isn’t necessary to allocate additional funds.

Is the current optimism surrounding the Indian economy warranted?
 

There are several factors supporting a faster pace of economic growth in India compared to previous years. These include a rising share in global manufacturing and services, improvements in physical and digital infrastructure over the past decade, a more favourable business climate, low levels of non-performing loans (NPLs), and a resurgence in capital expenditure (capex).

In our assessment, India has the potential to achieve a growth rate of 7-8 per cent in the coming decade, surpassing the 5–6 per cent real gross domestic product (GDP) growth seen in four decades.

What are your perspectives on the consumer and information technology (IT) sectors, which have gained prominence?
 

Given India’s demographics and low market penetration, the consumption sector presents enduring growth opportunities. However, we favour the consumer discretionary segment over consumer staples (fast-moving consumer goods) due to its projected faster growth trajectory. Moreover, the high margins and multiples of consumer staples companies are likely to moderate profit growth and returns, respectively.

The IT sector stands out as a high-quality and globally competitive industry. Nonetheless, its substantial size, widespread market penetration, and challenges in legacy business growth temper the overall growth outlook.

We maintain a neutral stance on this sector, considering its substantial derating and the pricing-in of many previously cited positives.

Banks have been major underperformers. Does the outlook remain bleak?
 

We maintain a positive outlook on banks. The business prospects appear promising, supported by low NPLs, minimal corporate leverage, and an uptick in capex.

Additionally, valuations are reasonable, further bolstering our confidence in this sector. In our view, there is ample room for rerating in the banking sector.

Will strong domestic liquidity prevent sharp market declines?
 

While the influx of new stock is substantial, our experience indicates that future returns correlate more closely with valuations than with liquidity.

Even so, the domestic flow of savings into equities has mitigated the volatility stemming from foreign flows, a development we view positively.

What are the expectations for returns going forward? Has alpha generation become easier?
 

Presently, India’s price-to-earnings multiples stand 10–20 per cent higher than historical averages. These valuations are well supported by promising growth prospects, a reduced cost of capital, and decreased volatility in equity markets.

While there is limited room for further rerating of multiples, returns are expected to primarily stem from profit growth.

Given the robust corporate margins, profits are expected to align with nominal GDP growth at an aggregate level.

Nominal GDP is forecast to expand at a compound annual growth rate of 10–12 per cent.

Looking ahead, alpha generation may prove relatively challenging. This is attributed to reduced dispersion in valuations, indicating fewer mispriced large spaces.

You favoured PSUs when it was a very contrarian idea. What is your view on PSUs now?
 

A few years ago, PSUs were undervalued, largely due to their presence in economically sensitive sectors, which were adversely affected by the pandemic. With the economy now on the path to recovery, PSUs have seen a massive rerating.

The time has come to evaluate PSUs as individual businesses rather than as a group. In our assessment, while defence stocks are currently priced with optimism and growth, utilities are considered to be fairly valued, with limited room for further rerating. However, there still exists some room for rerating in the case of large banks and non-banking financial companies.

Your departure from the MF industry came as a surprise to many. Has the move been more rewarding?
 

I had a long and fulfilling career in the MF industry. The primary reason for leaving HDFC MF was my desire to no longer chase targets and market share growth after more than three decades of doing so.

I also felt that embarking on the challenge of building something from the ground up once again would be both rewarding and enjoyable. Fortunately, the transition has been seamless, and our new venture has enjoyed a promising start. With strong investment performance and successful scaling, I am pleased with how things have unfolded.

The 3P India Equity Fund’s AUM has breached Rs 11,000 crore in just 12 months. What factors have contributed to this success?
 

Our timing has proven fortuitous, benefiting from the favourable winds of a robust Indian macroeconomy and capital markets. Also, the fund’s structure as an open-ended fund, coupled with the absence of any exit load or lock-in requirement, has appealed to investors.

A transparent and competitive fee structure, along with balanced communication and a robust compliance culture, has further resonated with our clients.

Both my colleagues and I have invested a large portion of our wealth in the fund. We have made a commitment to refrain from directly purchasing any listed Indian equities in our personal accounts.

Our strategic focus on the top end of the market has allowed us to maintain a lean customer base, effectively managing costs and enhancing efficiency.

Have you set any targets for 3P?
 

We are avoiding setting specific targets. Our primary aim is to deliver excellence and provide value to our customers. Let’s see where our journey takes us.