Vinay Sharma, Fund Manager – Equity investments, Nippon India Mutual Fund

22 Aug 2023 , 09:36 AM

Could you share your approach to identifying such innovative companies and what criteria you use to evaluate their potential for investment?

We are looking at broadly some characteristics that are defined below for companies to be part of the innovation universe. Once a company comes into the filter of being an innovative company than for the purpose of investment the only that matters is whether the medium term risk reward is in favor for an investment and whether we can expect a good IRR on our investment in the medium term. The characteristics that we are looking for in a company to be a part of the innovation universe are as follows:

• Proven history of investing in next generation technology/platforms to increase market potential for the company
• Proven history of product/process/service or business model innovation to increase market potential for the company
• Companies that are part of an industry where a technology change is forcing majority of the participants to change their business model or major product lines.
• Companies that are part of the digital economy or doing part of the business through digital means
• Companies that are using data to gain significant network, scale and increasing potential customer franchise
• Business disruptors across sectors using new technology or new products
• Companies part of MNC groups that have access to innovative solutions, global technology and global capital

How do you stay informed about the latest market developments and technological advancements to make informed investment decisions?

Institutional investing has become like game of football now where all team members need to put in a cohesive effort to get results. It’s the same for this fund or any other fund that we manage. We have a team of analysts and fund manager who are all always working to figure out trends and developments in their respective sectors. Today innovation is disrupting business models in almost every sector and business cycles are getting shorter due to this. Hence it has become part and parcel of our day to day job to be updated on changes in various sectors and global developments that can affect our coverage universe in the medium to short term.

How do you ensure a balanced and diversified portfolio while maintaining a focus on innovation-driven companies?

Our endeavor in this fund would be to select leaders across sectors that qualifies our criteria and not to make it a narrow sector fund. As we have highlighted in the previous question that today technology and innovation has become business critical in majority of the sectors and hence diversification is not a big issue for us in the fund. We expected majority of the big sectors that are part of Indian public equity space to be present in the fund at various points of time depending on the risk reward potential.

How do you manage the risk-reward balance in the portfolio to ensure long-term growth?

Our approach is to look for potential winners and decent IRR in our investments however at Nippon managing risk has become a prime focus of all our actions. We will follow the same philosophy here and, in this fund, since the focus in on high quality franchises, business leaders, technology leaders we believe quality of the portfolio should be good. The only additional risk here would be in the form of technology risk in some of the business models however that is where the strength of research franchise comes into play to select investments where medium growth potential is higher than what the consensus is building in these companies.

Who should invest in Nippon India Innovation Fund?

The fund is meant for investors with long term horizon who want to invest in a fund that could potentially deliver as India moves up the services and manufacturing value chain. We believe if India has to deliver the 6-7% real GDP growth that we are aspiring as an economy then it is imperative that India moves up the curve in innovation, technology and high-end exports. This fund would endeavor to participate in that journey and identify potential winners that can benefit from that journey. Hence it is important to have a long term horizon while investing in this fund.

How long should one stay invested in Nippon India Innovation Fund?

We believe equity are a long-term product by nature and one benefits from staying longer term because of the compounding that equites can potentially offer. This fund is no different, the idea behind this fund is to participate in journey of Indian economy to move up the value chain in various sectors and emergence of new themes in the economy. Hence the time horizon for this fund should be minimum 4 to 6 years.

The business models of tech/digital companies are still evolving in India, with only a few of them managing to achieve breakeven. How do you approach this challenge in selecting investments?

There are few parts to this answer one and most important is that we are looking at potential leaders in innovation across the sectors and hence some of the businesses we invest in would have established business models with good profitability. There would be certain investments where business models might not be very old and these could be part of new sectors that emerge as India evolves and moves up the value chain. However, we believe analyzing technology risk and risk of sustainable profitability is now part of many of our investments and hence this is not a new thing for us as a team. More and more new business models would get listed in public markets in the medium to long term and as a team we would get more experienced and inepter in analyzing these new business models. So these are very exciting times for us as investment professionals and we are looking forward to face these challenges.

How do you factor in corporate governance risks while identifying your investee companies?

Again the answer to this is very similar to the previous question. As a team it’s part of our investment process to analyze the potential risks that we can envisage in our investments. We give a lot of importance to quality of management in our investment thesis and hence all possible efforts are done to understand any potential corporate governance risks and understand how minority shareholder friendly managements are while making investment decisions.