Meet Rupesh Patel, an engineer who became a Rs 43,000 crore fund manager

From civil engineer to project manager with Gujarat State Road Development Corporation to currently managing Rs 43,000 crore, Rupesh Patel's journey is a testament to finding one's inner calling.

Patel, now a senior fund manager with Nippon India Mutual Fund, says that he was "a staunch technocrat" in his engineering days. However, he later decided to pursue an MBA in hopes of expanding his knowledge. That's where he discovered a love for numbers, business creation and scaling up. Starting his career in project development, Patel soon realised that his true passion lay in finance. His subsequent move to a rating agency laid the foundation for his career in equity investments.

Currently, Patel manages the Nippon India Growth Fund and the Nippon India ELSS Tax Saver Fund. In this interview, he shares insights into his professional journey, unique investment framework, and strategic approach to investing in mid-cap segments following the recent market rally.

What drew you to the equity markets, considering your background in civil engineering and stint as a project manager at the Gujarat State Road Development Corporation?

If we look at equity investing in its truest sense, it's about finding the right business and staying invested in it for the long term. If your bets play out, the rewards are enormous. However, if you make a mistake, the impact can be severe. The entire challenge of picking the right businesses to ride and ignore the wrong ones drew me into the world of equity markets.

During my engineering days, I was a staunch technocrat, with subjects like Structural and Foundation Engineering and Advanced Construction Techniques being my favourite subjects. After completing my engineering degree, I thought of learning something new and widening my horizon. Instead of continuing with engineering, I decided to pursue an MBA. During my MBA, I developed a fondness for numbers, learnt about how the businesses are created and scaled up and the creation of wealth in the stock market.

Despite my interest in finance, I began my career in project development, where my responsibilities included identifying projects, conducting pre-feasibility studies, determining their viability and overseeing the entire bid management process. Though the work was exciting, I felt my true passion lay elsewhere. So, I joined CARE (a rating agency), which laid the foundation for developing my passion for equity investments. My experience of working with a credit rating agency taught me the basics of fundamentals and gave me the real tools to analyse businesses and look at them from the right perspective.

You've had quite a journey, from working at a credit rating agency to portfolio management services (PMS) and spending around 13 years at Tata Mutual Fund. What key lessons have you learned from your experiences at these different organisations?

Yes, I have around two and a half decades of experience in project development, credit rating, real estate investing, equity research and public equity management. It's been a remarkable journey, and in a way, I consider myself lucky that I got exposure working at various places. In terms of learning from my experiences at CARE, Tata Mutual Fund and now at Nippon India Mutual Fund, I have worked with many individuals who are more knowledgeable and are smarter than me, which has significantly helped me shape my perspective on multiple facets of investing. Specifically, my stint at a credit rating agency has taught me the importance of balance sheets and cash flows. Speaking about my career at Tata Mutual Fund and equity investing, I have acquired skills such as identifying longer-term opportunities, filtering out noise and practising patience from many of my colleagues and seniors.

Can you tell us about your overall investment philosophy? What types of stocks or market conditions excite you?

My fundamental belief in equities is that you make money by buying good businesses that can grow reasonably over a long period. One can find such growth in companies that are linked to economy, gain on account premiumisation trends and market share gains. There are multiple factors and reasons for investing in stocks related to these themes. I also believe that companies that have strong growth, are well-managed and have reasonably leveraged balance sheets, when purchased at the right price, will yield returns for investors. So, buying such companies and staying invested in them for the long term is the main criteria.

Secondly, I have observed that, in my experience, a lot of great investment opportunities arise when there is a gap between the market's perception of risk versus the actual risk. These mismatches can happen for various reasons, such as company-specific factors, industry-specific factors or just market-specific factors. Thus, it is crucial to approach these opportunities with a flexible mindset.

You manage the Nippon India Growth Fund, which has been in existence for nearly 29 years. How has the fund adapted its investment strategies to navigate different market cycles and economic conditions over the years?

I started managing this fund in January 2023, and currently, we are examining opportunities in three buckets.

Firstly, we allocate a significant portion of our portfolio to businesses that have potential to grow significantly compared to their current size. The key is to buy them and remain invested in them over time as they scale. Instead of focusing on the next few quarters or near term market noises, here focus is to consider their long-term outlook. This forms the core of the portfolio, where significant allocation occurs.

The second part, often called a 'bucket of mispricing', can arise from factors specific to a company, market or industry. The market may have overreacted to near-term news, or because of some narrative, the stock price gives you an opportunity to get in when the risk-reward equation is very favourable. They may not be great businesses or ones where you have a long term view but they are currently attractive from a price perspective.

Third, as I said, are companies which have some kind of optionality around them. Some new-age tech businesses may fall into that category because we know the opportunity is huge for them. But not all of them will succeed. However, those who succeed and can capture the profit pool over there, the payoff for a patient investor can be phenomenal. I believe a combination of these three approaches is suitable. That is, the approach we follow while constructing the fund's portfolio.

You also manage the Midcap Fund (Nippon India Growth Fund). This year, the mid-cap index is up by 25 per cent. Where are you finding opportunities in such a dynamic market?

The small and mid-cap category's returns in recent years have been phenomenal. Currently, most businesses appear to be fairly valued providing limited room for disappointment. However, there are pockets of opportunities in the market. For example some of the consumer companies have underperformed over the last 2 -3 years. This is because their starting valuations were higher, and at the same time, they faced headwinds in their own businesses on account of weak demand. So, there is a time correction that has taken place and valuations have also corrected as compared to where they were a few years back. This should see an uptick as the consumer demand improves. We have selectively started looking at some of the names in that space. Even Consumer Discretionary attracts us, as it fits with the long-term opportunity that India offers in terms of high per capita income, growth driven by premiumisation and improving penetration levels.

Another segment that we like is the financialisation of savings. Again, I believe this is a longer-term trend, and as awareness levels rise, per capita incomes rise and we meet our basic needs, surplus will become available for investment. The beneficiaries of this theme will include intermediaries as exchanges and distributors of financial products, Insurance companies and asset management companies.

Thirdly, we believe the Power sector presents a promising opportunity, as it has not seen significant investments in the last decade or so despite the continued growth in demand. Investments required on account of our focus on renewable energy is another added positive.

With nearly 100 stocks in the Nippon India Growth Fund portfolio, what does such a high number of holdings indicate about your investment strategy?

As we speak, we would have around 90-92 stocks in our portfolio. I think many of the stocks you see are at the portfolio's tail end. This is because we are still in the process of building up our positions, or we are in the process of exiting some of them. Since it's a large fund, it takes time to build positions or to exit one. Secondly, at times you try to play a specific theme with a basket of stocks and not a single stock. This may be done taking into account available liquidity and the risks arising out of owning a single stock for playing the theme. This is why the number may appear on the higher side. Having said that, the portfolio remains fairly well concentrated among top 20-30 stocks and it's the long tail that is taking the count on the number of stocks higher.

What was the most surprising market trend or event you've encountered in your career? How did it influence your approach to investing?

I believe it was Covid period starting March 2020. During the Covid-19 pandemic period, it was challenging to know how things will change post covid and what impact is temporary and what is permanent. But again, learning from credit risk experience that resilience comes from the strength of the balance sheet helped in evaluating right investment opportunities. So, if you have a strong balance sheet and manageable debt, you will be able to see through those tough times. Finally, we should all remember that investing is a probabilistic process. At the end of the day, equity investing is all about dealing with probabilities.

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