Rising stars in mutual funds: Pankaj Tibrewal on spotting mid and small-cap stocks early

As a fund manager of two highly successful schemes from the Kotak Mahindra MF stable, Tibrewal talks about holding on to winners and not obsessing over valuations

March 30, 2021 / 08:22 PM IST

Note to readers: Although most fund houses are process-driven and mutual fund schemes are driven by many guidelines,  a money manager’s role cannot be undermined. At the heart of fund management is a core team of analysts and fund managers who track multiple sectors and companies on a day-to-day basis. And every scheme has a designated fund manager who is responsible for its long-term performance.

In this five-part series, we have identified the next generation of fund managers who hold the potential to become top performers. All of them are under 45 years of age. Today, we meet Pankaj Tibrewal, Executive Vice-President and Fund Manager, Equity, at Kotak Mahindra Mutual Fund.

Pankaj Tibrewal, 42, began his career as a credit analyst two decades ago. Today, he manages equity funds that have delivered strong performances, both in the recent past and over longer periods. His specialty lies in identifying small and mid-cap stocks. According to data from Value Research, Kotak Emerging Equity Fund has been the top-quintile performing fund in the last three, five and seven-year periods in its category. Kotak Small Cap Fund has also been a top-quintile performer in these periods in its category.

Focusing on companies that are leaders within the sectors they operate in has worked well for Tibrewal. “Leaders aren’t just found in large-sized companies, which is what many people think. Within mid and small-caps, too, we can get companies that are leaders in sectors such as electrical wires, cables, bearings, tiles, capital goods or infrastructure,” he says.

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Making most of the market crash

Now, 2020 was initially tough for fund managers. But it also rewarded those with patience. The S&P BSE Sensex fell 28 percent during Jan-March 2020, as the pandemic took roots. Some small and mid-cap stocks declined by as much as 40-60 percent from their highs.

“The stock market reaction was quite extreme,” he recalls. Tibrewal took this opportunity to increase his schemes’ investments in many existing companies. Meanwhile, from its lowest point, the Sensex rose 73 percent by the end of the year.

Tibrewal likes companies with low levels of debt and those that can generate return on capital higher than their cost of capital over long periods of time, and re-invest cash flows back into business at higher rates of return.

Companies that gained market share despite COVID-19 were on his radar. Some of his underlying companies had also demonstrated their resilience during the 2008 financial crisis, which inspired Tibrewal to increase his schemes’ investments in them.

Stocks that propelled fund returns

Tibrewal’s portfolios hold clues on the stocks that drove the performance of funds managed by him. Gujarat-based Alkyl Amines Chemicals, which is a part of Kotak Small Cap Fund, has delivered nearly five-fold returns in one-year. The chemical company is one of the leading producers of amines, where competition is limited.

The plastic pipe-making company Supreme Industries and AU Small Finance Bank are held in all the three funds managed by Tibrewal. The Mumbai-based Supreme Industries has multiplied 2.3-times in one-year. The stock price of Jaipur-based AU Small Finance Bank has doubled in this period.

Holding onto winners, not obsessing over valuations

Tibrewal says holding onto his winning stocks for a long period of time has worked well for his portfolios. “We held onto our investments in an electronic contract manufacturer, even though its price corrected in the pandemic. We stuck to our conviction and its stock price rose ten times from the pre-COVID levels,” he says.

One of Tibrewal’s biggest lessons over the years has been to not just look at valuations, but also a company’s growth potential. “Valuations should not be looked in isolation. There have been instances, where we identified a stock early, but we also sold it off early. From our selling price, the stock price has multiplied. The growth of these companies surprised us,” he says.

Disclaimer: None of the parts of this write-up should be taken as a recommendation. Please consult your financial advisor before taking any investment decision.
Jash Kriplani is a journalist with over ten years of experience. Based in Mumbai. Covering mutual funds, personal finance. His last stint was with Business Standard, where he covered mutual funds and other developments in the financial markets
first published: Mar 30, 2021 10:56 am

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