We want to invest in businesses that we believe will grow their earnings at a rapid pace

What is your outlook on the Indian economy in the post COVID scenario?

Covid has been a big disruption for every major global economy and India was no exception. India's GDP growth rate fell sharply last year on account of lockdowns that were imposed to control the spread of Covid-19. However, since then market has seen a phase of restoration with GDP growth returning back to positive. We are optimistic on the current growth trends and expect economy to grow at rapid pace in the coming years. There are multiple factors supporting this expansion. A few important ones are expansionary policies of the central government, low interest rate scenario in the country today and strong global growth that is helping exports from the country. In addition, India continues to receive huge amount of FDI into the country that provide additional fillip to the growth. Given these tailwinds, we remain constructive on future growth.

You are launching a midcap fund. The Nifty Midcap 150 index has seen a strong rally in the last one year. Are you concerned about valuations in this segment?

One needs to look at valuations in conjunction with the growth a business is witnessing. Corporate earnings have grown at single digit growth rate annually over the last decade and the valuations over the last decade was based on this relatively low growth rate scenario. However, the current consensus estimates point to a strong earnings growth for midcap companies. In addition, the cost of capital currently is close to a decadal low. The current valuation in the market reflect this higher growth expectation and low cost of capital scenario. We don't believe looking at valuation in isolation is the best way to look at attractiveness of the market but rather one should look at them from prism of growth and low cost of capital scenario we are in. Keeping those factors in mind, we don’t believe there is big cause of concern as far as valuations are concerned.

Please describe the salient features of your midcap fund. What will be your investment style in this fund - growth, value or a combination of both? Also, please describe your investment strategy - will it be top down or bottom up?

We are optimistic on the growth that our economy is likely to witness in the coming years. In line with that our portfolio will also have a growth orientation. We want to invest in businesses that we believe will grow their earnings at a rapid pace. Now these ideas will primarily come from our bottom up analysis which will have an overlay of our macro view. As the focus of the fund is investing in quality fast growing midcaps, we need to be evaluating every investment opportunity individually and to that extent our portfolio will primarily be built with both top down and bottom up stock ideas.

Midcap stocks have presence in sectors where large caps do not have any presence. Do you see high revenue and earnings growth potential in some of these sectors?

Midcap stocks offer more diversified universe for Investment than large cap. We believe there are opportunities available across many sectors that find little space in large cap indices. To that extent we have an opportunity to invest into more diversified themes vis-à-vis large caps. Many of these additional sectors have a very large opportunity size which many midcaps companies are taking advantage of and continue to grow at a rapid pace. We are excited by this opportunity and definitely see midcap companies being big gainers there.

Well managed midcap funds have historically been wealth creators for investors. What is your process for identifying midcap stocks that can generate alphas and create wealth for investors?

We are following a 4Q approach to choose the midcap stocks in our portfolio which are

1. Quality of Business,
2. Quality of Management,
3. Quality of Earnings, and
4. Quantum of Earnings.

These 4Qs help us in identifying and evaluating the midcap companies in a structured manner. First thing we look at is the Quality of Business i.e business should be scalable, the company should be relevant in the industry it operates in, regulatory hurdles should be limited, etc. Two - it should have good quality management as indicated by their historical track record, their capital allocation decisions, etc. Three - the company should have good quality of earnings as defined by RoCE profile, cash flow conversion, consistency in earnings etc. and Four - Quantum of Earning by which we mean that it should be increasing its profit by large quantum. We believe companies that display these four characteristics are the one that would be leading the growth cycle that is there in front of us and will be able to generate alpha for the investors.

For the benefit of investors, please describe in brief the process of your in-house research for midcap stocks.

We have a robust investment process that our in-house research team uses to identify the investible ideas for a portfolio. In the first phase the stocks are screened based on their sustainable earning growth. From there, the team analyse these screened ideas from the prism of quality. Each idea is evaluated based on factors such as their competitive advantage, management track record, capital allocation decisions, return profile, etc. We actively gauge the ESG impact to mitigate risks and capture opportunities. And then a composite valuation framework is used to ascertain the fair value of a stock.

Is this a good time to invest in midcaps with a long term investment horizon? What is the minimum recommended investment horizon for investors who may be looking to invest in your midcap fund? Please share your views.

We believe many midcaps of today have the opportunity and ability to grow at a rapid pace and become large caps of tomorrow. They are on a journey to become much larger players in their respective segments as long as they execute well and capture the opportunity that the strong economic growth cycle is providing. Typically, maximum returns are generated when investment period coincides with the evolution of the business till it becomes stable. Since, the time period for the stability of businesses should come in 5-7 years, an investment horizon should also have the same time frame.

Product Labelling: To provide investors an easy understanding of the kind of product / scheme they are investing in and its suitability to them, the product labelling is as under:

Product labelling assigned during the NFO is based on internal assessment of the scheme characteristics or model portfolio and the same may vary post NFO when the actual investments are made.

Mutual fund investments are subject to market risks, read all scheme-related documents carefully.

The above information are for illustrative purpose only and it should not be considered as investment research, investment recommendation or advice to any reader of this content to buy or sell investments. Various index and their constituents and other stocks discussed in this document are for illustrative purpose only for explaining the concepts stated in this presentation and it should not be considered as investment research, investment recommendation or advice to any reader of this content to buy or sell investments. From the asset allocation perspectives, the Scheme shall invest minimum 65% of AUM in those mid cap stocks which meets the criteria of Mid Cap Stocks as defined by SEBI i.e. 101st to 250th stock in terms of total market capitalization of the stock.

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