(Bloomberg) --
A Franklin Templeton India fund is turning to initial public offerings to help keep it in the top ranks of the nation's mutual funds as rich valuations have made it hard to pick winners among small-cap stocks.
The $1.2 billion Franklin India Smaller Companies Fund is up 34% this year, beating 98% of its peers. The fund's IPO picks — Concord Biotech Ltd., TVS Supply Chain Solutions Ltd. and SBFC Finance Ltd. — have rallied between 15% to 50% since their trading debuts in August, data compiled by Bloomberg show.
“A few IPOs in the small-cap space that have come in last 6-9 months have quality businesses,” Janakiraman Rengaraju, a Franklin Templeton portfolio manager, said in an interview. “We have tried building positions in some of them as a part of our portfolio redeployment.”
Small- and mid-sized stocks in India have been on a tear this year, helped by record inflows into companies more exposed than their bigger counterparts to domestic economic growth that is among the world's fastest. Some funds have been forced to turn away investors, with one strategist saying the steep rally is a case of ‘irrational exuberance.'
The Nifty Smallcap 100 Index trades at 16.2 times one-year forward earnings, or 26% premium over the MSCI Emerging Markets Small-Cap Index, according to data compiled by Bloomberg.
“We're taking some money off a few stocks that are extremely valued,” said Rengaraju, who has been running the fund since 2011. The fund has completely exited its position in Anupam Rasayan India Ltd. and significantly trimmed its holdings in Titagarh Rail Systems Ltd., according to the most recent data.
Anupam Rasayan, a specialty chemicals maker, has risen about 60% since its debut in March 2021, while Titagarh Rail has more than tripled this year.
Concord Biotech, which has surged more than 50% since its debut in August, makes fermentation-based APIs, a business that has a high entry barrier due to lengthy development timelines. Funds managed by investor Rakesh Jhunjhunwala's family are among the company's key backers.
TVS Supply Chain, part of southern India based TVS Group, has gained 15% since listing, while SBFC Finance Ltd. has rallied 48% since start of trading in August.
“In small caps, what I look for is a reasonably settled business model, a large addressable market and strong promoter,” Rengaraju said. For smaller-sized firms, the role of founders can make a major difference, he added.
--With assistance from Chiranjivi Chakraborty.
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