Beyond tech: Kotak MF’s Shibani Kurian on India’s next innovation-led winners

Innovation-led investment opportunities in India are extending well beyond technology, with healthcare, auto components and industrials emerging as key areas of interest, according to Shibani Kurian, Head of Equity Research and Senior Fund Manager at Kotak Mahindra AMC. “Innovation can be seen across sectors and not necessarily limited to technology,” she said.

Edited excerpts from a chat:

Kotak Pioneer Fund has delivered 21% CAGR since inception. What have been the key contributors to this outperformance?

The Kotak Pioneer Fund is invested in a diversified basket of Indian “innovative” businesses (which we largely define as those gaining market share) and global diversified technology ETFs/funds. Within the Indian basket, we invest in 40-50 businesses in India (~ 85% of portfolio). These straddle multiple themes, from digital ecosystem to companies focused on global value chains in manufacturing sector to companies catering to consumer discretionary that have used past disruptions to further improve their customer salience to companies in healthcare and chemical space.

Innovation is often equated with technology. Which non-technology sectors such as retail, industrial manufacturing, healthcare, automobiles or auto components are currently generating the most compelling investment opportunities, and why?

Innovation can be seen across sectors and not necessarily limited to technology . Among the non-technology sectors we are positive on healthcare, auto components and industrials among other segments.

Within the healthcare space, India branded generic growth has been robust helped by the chronic segment. CDMO players are also likely to see steady growth as long-term contracts ramp up. Global pharma giants are seeking partners outside China to de-risk their supply chain driving a structural opportunity.

We also expect steady growth and profitability within the hospitals segment led by expansion plans. While there are some near term regulatory uncertainties, the runway for growth is long. Diagnostics as a space is also exhibiting strong growth with better visibility on margins as competitive intensity is becoming more rationale.

Similarly, there are many opportunities in the manufacturing and industrials space. Steady order inflow and execution momentum as well as growth in industrial consumables remain the key drivers. While growth in ordering by Government may be slower in near term due to fiscal constraints, private sector spends appear to be gradually improving. New age sectors like semiconductors, renewable energy, data centers and green hydrogen are likely to add to growth going forward. Nuclear ordering is also likely to pick up in medium term. Players across the power transmission and distribution equipment and industrial machinery, precision engineering and defense are also expected to see sustained growth.

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Innovative companies often command premium valuations. How do you assess whether that premium is justified by future growth, and what are the warning signs of excessive market excitement?

Our investment philosophy remains growth at a reasonable price. We focus on bottom-up stock picking with a top-down thematic overlay. Our bottom-up stock picking follows our internal BMV model – Business- Management and Valuations. Hence our focus is to pick high growth companies, high-quality companies, companies which are gaining market share but are trading at reasonable valuations. Our focus is on balance sheet and return ratio profiles in conjunction with growth.

The fund invests across large-, mid- and small-cap companies. Where are you currently finding the strongest innovation-led opportunities, and how does the risk-reward profile differ across these market segments?

Of the Indian basket, ~ 40-60% is invested in large caps, with balance in midcap and small caps. The focus is on bottom-up stock picking. Indian businesses are seeing a “reset” moment. Both changing government regulations and disruption by technology, Indian businesses that are quick to adapt to this environment are likely to have a long growth runway. These investee companies have exhibited either focus on technology, a differentiated business model that is aiding them to increase market share, improve margins, ROE in a tough environment. The thought is that in a post covid world, companies that have gained mind and market share will likely emerge stronger.

India’s consumption landscape is changing rapidly, particularly with the rise of digital-first businesses and new retail models. Which structural changes do you believe can create durable long-term winners?

India’s consumption landscape is increasingly being shaped by convenience, premiumisation and digital discovery.

We are seeing greater consumer segmentation and premiumisation at the same time. At one end, affluent households are increasingly willing to pay for convenience, premium brands, and experiences. At the other, digital platforms are dramatically improving price discovery and product availability for value-conscious consumers.

Digital distribution is democratising access beyond the metros. This creates room for very different models to win, from premium brands to value-led marketplaces.

The next phase will likely be much more focused on profitability and capital efficiency. Digital platforms and new retail models have lowered barriers to entry and made it much easier for emerging brands to reach consumers, but scale alone will not guarantee durability. Over time, we believe the winners will be those that combine brand strength and product differentiation with sustainable unit economics. Ultimately, cash flows, capital efficiency and the ability to stay relevant as consumer preferences evolve will separate long-term winners from businesses that simply scale quickly.

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The portfolio has 17.2% exposure to overseas mutual funds. What does global exposure add to the portfolio that cannot be captured through Indian companies, and how do you manage currency and geographic risks?

Around 15-18% of Kotak Pioneer Fund is invested in overseas funds. We have invested in Ishares Nasdaq 100 UCITS ETF, which is large cap US tech-oriented companies which are in forefront of R&D spending across social media, semiconductors, media, ecommerce etc. The portfolio companies in these funds are among the leaders in their respective sectors. This should stand them in good stead over next 3-5 years. We have also invested a small position size in GenInnov Global Master Fund, which invests in the technology and related space.
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