MC Exclusive: Prashant Jain says 3P Fund’s outperformance like cricketer scoring a century on debut; Nifty should compound at 12%

India’s most celebrated value fund manager and former CIO of HDFC Mutual, Prashant Jain, attempted to moderate expectations of investors in his newly launched fund, even as the scheme delivered outstanding performance, generating nearly double the return seen in the Nifty since the fund kicked off in May 2023.

In his latest quarterly newsletter, Jain said the fund’s performance was akin to a cricketer scoring a century in his debut match. “Sourav Ganguly scored 131 runs in his debut test, and his overall average was 42 runs (113 test matches). The fund’s strong start must be looked at similarly,” he said.

3P India Equity Fund delivered a return of 42 percent since May 4, 2023, far outpacing Nifty 50’s 24 percent and Nifty 200’s 31 percent during the same period.

Jain clarified the fund’s NAV was on a post-tax basis. “Currently, the provision for tax on gains is on a short-term basis. We expect the provision for tax to moderate as short-term capital gains convert to long-term capital gains over time,” the newsletter said.

As of March 2024, the fund had a corpus of close to Rs 8,800 crore.

Jain said though it was counterintuitive, in an environment where real economic growth is likely to accelerate, profit growth should slow down. He said this is because, in the last two years, there has been a broad-based recovery in corporate profitability. Corporate profits to GDP have increased from 1.1 percent in FY20 to 5.5 percent in FY24, and the number of loss-making companies in NSE 500 has declined from 60 to 31, he noted.

“Corporate profits are likely to grow around 12% CAGR for the next two years. Low inflation and a stable rupee also lower the growth of nominal GDP and profits,” he said.

On the valuation front, he said that Nifty, trading at 21x FY25 and 18x FY26 PE, commands earnings multiples that are 12 percent and 22 percent higher than their 10 and 15-year averages, respectively.

“India’s improved growth prospects, lower cost of capital, and higher domestic equity flows are supportive of these multiples. However, as multiples have limited room to expand, these markets present a compounding opportunity,” he noted. “We believe Nifty, over the long term, should compound at ~12%. These returns broadly comprise of 6-8% real growth and 4-6% inflation,” he wrote.

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