Fund Performance Overview:

In the first nine months of 2024, the fund delivered a robust return of 23.95%, significantly outpacing the index’s 19.9% gain. This brings our cumulative returns since inception to an impressive 361.5%, compared to the index’s 247% over the same period, reflecting an annualized IRR of 21.8% (net of fees). Our strategy of investing in quality companies in the right cycle with disciplined capital allocation and risk management has been fundamental to this outperformance.

The portfolio’s positioning is skewed towards large-cap companies, with a weighted average market capitalization of ₹3.05 lakh crore (USD 28 billion). This large-cap bias is particularly prominent in sectors like Pharmaceuticals, Consumer Staples, Power, and Insurance, which we believe provide stability and diversification. Our underweight sectors include Banking and IT, reflecting our view on these sectors’ current risk/reward profiles.

Key Market Drivers: Our investment approach is shaped by three key factors: earnings growth, liquidity, and valuations.

1. Earnings Growth: Earnings across Indian markets have been robust, driven by strong RoE (Return on Equity) improvements over the last four years. This expansion in RoE has been more consistent in large caps, which tend to manage growth, margins, and balance sheets more effectively. In contrast, midcaps and small caps have shown more volatility, primarily due to cyclical fluctuations in their RoE. However, these segments also offer the highest potential for future RoE expansion, presenting select opportunities for growth.
2. Liquidity: Domestic liquidity remains strong, with retail and institutional inflows supporting the market. This is buoyed by global trends, such as the US Fed maintaining easy monetary policies and China cutting rates to stimulate growth. Domestically, inflation remains under control, and while rate cuts in India are not imminent, market liquidity continues to increase. This strong domestic participation has absorbed significant supply and continues to support the market.
3. Valuations: Valuations in India are currently at the higher end of historical ranges, particularly in mid and small caps, which are trading at 2 standard deviations above the mean. While this doesn’t necessarily imply an imminent correction, it does suggest a less favorable risk-reward profile in certain segments. We continue to seek opportunities where earnings growth is strong, and valuations remain reasonable.

Sectoral Positioning:

1. Pharmaceuticals: We have significant exposure to the sector, focusing on companies with strong growth potential in domestic and international markets, such as Dr. Reddy’s Laboratories, Aurobindo Pharma, and Ipca Laboratories.
2. Power: A key theme driving our portfolio positioning is the power sector. After a decade of underinvestment, the top power companies are expanding capacity. This growth is supported by strong demand, leading to increased transmission capacity and substation utilization. We are optimistic about the sector’s long-term growth potential, particularly in players like NTPC and Power Grid Corporation of India.
3. Rural Recovery: Rural consumption is another area of focus. After four years of slow growth, we are now seeing early signs of recovery. Higher agricultural income, increased government welfare spending, and improved rural lending have boosted demand in this segment. Our investments in ITC and Marico are positioned to capitalize on this trend, as these companies are poised to benefit from rising rural demand.
4. Auto and Consumer Staples: We have reduced our weights in the auto sector, with residual positions in two-wheelers and passenger vehicles. Companies like Maruti Suzuki and Bajaj Auto are well-positioned to capitalize on this growth. In the Consumer Staples sector, our increased allocation to ITC and Marico reflects our confidence in the rural recovery and expanding consumption.
5. Insurance: The insurance sector, represented by companies like SBI Life Insurance and ICICI Lombard, remains a key overweight in our portfolio. The underpenetration of insurance products in India presents significant growth opportunities.
6. Managing Risk and Opportunities: In this environment of above mean valuations, managing risk is as important as positioning for upside. We focus on sectors where we see strong earnings growth combined with reasonable valuations to ensure the portfolio remains resilient. Our portfolio continues to maintain a healthy growth trajectory, with earnings per share (EPS) expanding by 30.6% year-on-year. Our forward price-to-earnings ratio (PE) stands at 26.7, and the PEG ratio (Price/Earnings to Growth) is 1.32, highlighting the balance between growth and valuation.

Looking Ahead: As we move forward, we expect the market to become increasingly sector-specific and stock-selective. Liquidity will remain a crucial factor, particularly as primary issuances increase, and incremental liquidity becomes scarcer. Our focus remains on secular growth trends, such as power infrastructure and rural recovery, while maintaining a disciplined approach to managing risk through valuation awareness and portfolio construction.

We are confident that our large-cap bias, combined with selective exposure to high-growth sectors like Power, Insurance, Pharma, and Rural Consumption, will enable us to navigate the current market environment successfully.