Bandhan Small Cap Fund that outperformed 93% of peers turns to internet value stocks

Smaller stocks remain challenged. The Nifty Smallcap 100 is down 2.7% year-to-date, underperforming the large-cap Nifty 50 by more than a percentage point. Bloomberg

• Bandhan Small Cap Fund adds Paytm, Info Edge, IndiaMart shares
• Fund focuses on undervalued small-cap stocks for growth potential
• Portfolio heavy in financials, real estate, textiles, renewables

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India’s fast-growing but beaten-down Internet firms are among key picks for the Bandhan Small Cap Fund, which beat 93% of its peers last year betting on deep-value stocks.

The $2.1 billion fund has added holdings like Paytm, Info Edge India Ltd. and IndiaMart InterMesh Ltd. in recent months, according to Manish Gunwani, chief investment officer of equities at Bandhan AMC Ltd., which manages more than $22 billion. All three firms are losing money for investors this year triggered by doubts over their fast-paced growth and as investors seek comfort of steady earnings growth in large-cap names amid rising global volatility.

“We are comfortable buying unpopular value stocks” as long as there is a probability for them to double, Gunwani said in an interview on Tuesday, adding that smaller firms tend to have more room for growth than large caps. Some of these stocks are overcoming regulatory hangovers that have depressed their share prices and “bad news can be an opportunity to accumulate the stock,” he said.

Smaller stocks remain challenged. The Nifty Smallcap 100 — the benchmark for Gunwani’s fund — is down 2.7% year-to-date, underperforming the large-cap Nifty 50 by more than a percentage point. It’s far behind the MSCI Asia-Pacific index’s 11% gain. Still, rotation to undervalued shares has been a major markets theme this year, which may help India’s smaller firms gain momentum.

The small-cap fund, which holds more than 250 stocks, added about 1.6 million shares of Paytm owner One 97 Communications Ltd. in January as the firm continued to improve profitability, while plans for financial services such as a buy-now-pay-later product build hopes for further gains.

The fund’s portfolio is overweight financial services and real estate firms and has been adding in textiles, internet and renewables, while trimming metal shares. Holdings include textile firms Arvind Ltd. and Sanathan Textiles Ltd., yarn maker Nitin Spinners Ltd., and rice exporter LT Foods Ltd.

A custom gauge of 10 Indian textile makers has rallied more than 15% since India’s much-awaited trade deal with the US was announced earlier this month.

“Textile is not a very high growth sector, but at single-digit price-to-earnings you get a stock where industry fortunes can change, especially with trade agreements,” Gunwani said.