Baron India Fund | Q4 2024

Baron India Fund® (the Fund) declined 6.01% (Institutional Shares) during the fourth quarter of 2024, while its relevant benchmark, the MSCI AC Asia ex Japan/India Linked Index (the Linked Benchmark), was down 11.32%. As a reminder to investors, as of market close on August 30, 2024, Baron New Asia Fund was converted into Baron India Fund, necessitating a Linked Benchmark to allow the predecessor track record to attach to the new Fund. In essence, our reported performance represents the return of Baron New Asia Fund from July 30, 2021 (Fund inception date) through August 31, 2024 and that of the reconstituted Baron India Fund beginning thereafter. Similarly, the Linked Benchmark, effective September 1, 2024, will reflect the performance of the MSCI India Index, the primary benchmark of Baron India Fund, while the period from July 30, 2021 through August 31, 2024 will reflect the performance of the MSCI AC Asia ex Japan Index. For the full year 2024, the Fund appreciated 17.75% compared with 1.18% for the Linked Benchmark.

For the fourth quarter, the first full quarter of Baron India Fund, we comfortably outperformed our Linked Benchmark. After making fresh all-time highs toward the end of September, Indian equities partly retraced prior period gains owing to a near-term slowdown in domestic economic activity that resulted in earnings misses across various sectors. A Trump 2.0 presidency together with growing expectations that the U.S. Federal Reserve (the Fed) will need to recalibrate the pace of monetary easing going into 2025, also weighed broadly on emerging market (EM) equities. That said, the BJP’s (Prime Minister Modi’s political party) landslide victory in local state elections helped offset some of the selling pressure toward the end of November. In our view, India, compared to other EM peers, will be one of the least impacted from potential tariffs given it’s primarily a domestic consumer driven economy with a low share of global exports. In addition, we expect a further strengthening of the U.S.-India relationship under Trump 2.0 given tectonic shifts in the geopolitical landscape, especially as it relates to rising tensions between the U.S. and China. India, with its growing military and economic ties to the U.S./Europe, is increasingly being viewed as a strategic counterbalance to a rising China. The country will also be a key beneficiary of global corporates diversifying their supply chains (ex-China), with potential tariffs on Chinese goods and vendors further accelerating this mega trend, in our view.

From a sector or theme perspective, solid stock selection effect in the Consumer Discretionary sector, across multiple themes (Trent Limited, Zomato Limited, and Dixon Technologies (India) Limited), was the largest contributor to relative performance during the quarter. Trent, as part of our formalization theme, is a leading, high growth, fast fashion retailer that we internally refer to as the “Zara of India.” The company, in our view, is one of the most misunderstood stocks in India that has seen consensus earnings upgrades of above 100% over the past 12 to 18 months. The stock has more than quadrupled since our initial purchase in the legacy Baron New Asia Fund in May 2023. Zomato, belonging to our digitization theme, is India’s largest food delivery platform with over 50% market share. The company is now disrupting India’s e-commerce industry through its “Blinkit” app, which is a leading “quick commerce” platform, offering 10 to 15 minute delivery of over 5,000 (and growing) SKUs, including groceries, packaged consumer goods, electronics, apparel, among other products. Blinkit is scaling rapidly with gross merchandize value (GMV) expected to grow more than 100% (to over $3 billion) this fiscal year. In our view, we are in early innings of quick commerce disruption in India and expect Blinkit to sustain a 40% to 50% compounded growth rate for the next three to five years. Zomato’s core food delivery business should also maintain its high growth trajectory of over 20% compounded growth rate for the next few years. Favorable stock selection in the Health Care sector, driven by our investments in Aster DM Healthcare Limited and Max Healthcare Institute Limited, also stood out as a material contributor to relative results. We are excited about India’s hospital services industry, which is expected to sustain low to mid-teens growth over the next several years. With a rising middle class and growing discretionary incomes, we are witnessing a structural shift in consumer preference toward organized, high-quality, hospital chains that today account for only 5% to 10% of the industry. We believe there is a massive opportunity for industry consolidation to play out over the next few years and expect both Aster DM Healthcare and Max Healthcare to be key beneficiaries of this structural trend. Lastly, good stock selection effect together with our underweight positioning in the Energy sector also bolstered relative performance during the period. We will typically remain underweight Energy given the commodity/cyclical nature of the sector. Partially offsetting the above was adverse stock selection effect in the Financials (SBI Life Insurance Company Limited, Cholamandalam Investment and Finance Company Limited, and JM Financial Limited) and Communication Services (Indus Towers Limited and Tata Communications Limited) sectors.

For calendar year 2024, the Fund meaningfully outperformed the Linked Benchmark. We are pleased with delivering over 1,600 basis points of relative gains for the year, while also generating solid double-digit absolute performance (+17.75%). Due to the conversion of Baron New Asia Fund into Baron India Fund during the year, we will not provide full year attribution commentary given the change in Fund strategy.

Kaynes Technology India Limited is a leading electronics manufacturing service player in India serving the automotive, industrial, railway, medical, and aerospace and defense industries. Shares were up in the quarter, driven by robust sales and profitability growth. We believe Kaynes is well positioned to benefit from the government’s Make in India initiative, which encourages domestic manufacturing of electronic components by providing attractive tax subsidies and manufacturing infrastructure. We are excited about Kaynes’ recent development of its outsourced semiconductor assembly and test facility, which we believe represents significant incremental growth opportunity in the medium term. We expect the company to deliver 40% to 45% compounded EBITDA growth over the next three to five years.

Aster DM Healthcare Limited is the third-largest listed hospital chain in India with over 4,500 bed capacity. Shares were up, driven by robust quarterly results and the announced merger with Quality Care, which will make the merged entity India’s largest hospital chain with over 10,000 bed capacity. We are excited about the multi-year growth opportunity that lies ahead for hospital services in India, and we retain conviction in Aster as a key beneficiary of ongoing industry consolidation. We expect the company to deliver sustaining mid-teens revenue growth over the next three to five years.

Shaily Engineering Plastics Limited is a leading manufacturer of precision injection-molded plastic components in India, with diverse product offerings spanning sectors such as furniture, pharmaceuticals, and toys. Shares rose during the quarter, driven by strong quarterly results and the announcement of plans to double its injection pen manufacturing capacity over the next two to three years. We remain invested in Shaily, as we believe the company will benefit from global supply chain diversification away from China, as well as opportunities in GLP-1 pen manufacturing.

Bharti Airtel Limited detracted from performance during the quarter due to subscriber loss resulting from consolidation in the telecommunications industry. We retain conviction. The company reported steady quarterly earnings performance and visibility into strong free cash flow generation. As India’s dominant mobile operator, Bharti should realize longer-term benefits from industry consolidation. In particular, Vodafone Idea, a key player and competitor, is on the verge of bankruptcy amid severe pricing pressure and an unsustainable balance sheet. We retain conviction as Bharti transforms into a digital services company and profits from rising mobile tariffs.

Reliance Industries Limited is India’s leading conglomerate, with businesses that encompass petrochemicals, refining, and oil-and gas-related operations as well as retail, telecommunications, and media. Shares were down due to soft performance in the retail and energy businesses. We retain conviction as the company is positioned to leverage its telecommunications network to transform into a digital services company, offering products such as video streaming, broadband, and e-commerce services. Reliance is also laying the groundwork for an online marketplace that will connect over 12 million mom & pop retailers to over 400 million mobile and internet subscribers. We believe earnings will sustain double-digit growth over the next three to five years.

SBI Life Insurance Company Limited is one of the leading life insurance providers in India, offering a wide range of insurance products, including traditional life insurance, unit-linked insurance plans, pension plans, and health insurance. The company is a subsidiary of State Bank of India, India’s largest commercial bank, which gives it a strong brand presence and access to an extensive customer base across the country. Shares were down during the quarter due to weaker-than-expected quarterly revenue. We retain conviction in SBI Life as we believe the company is well positioned to benefit from growing demand for insurance services and the financialization of household savings in India. In our view, the company’s ability to leverage India’s largest bank branch network through its parent entity is a critical competitive advantage, and we expect SBI Life to sustain mid-teens growth in embedded value over the next three to five years.

We combine a bottom-up investment approach with a thematic overlay to construct and manage a portfolio of high-quality, competitively advantaged companies located in India. Consistent with the “Baron Approach,” we invest behind value-creating, private sector entrepreneurs with significant ownership stakes, whose businesses are either gaining market share, disrupting, or consolidating their respective industries. We leverage our deep relationships in the country to discover and invest in growth-oriented businesses for the long term.

The Fund is a diversified, all-cap strategy with the flexibility to invest across market caps, especially in small- and mid-cap stocks where we see significant mispricing due to limited sell-side coverage and/or those that remain “under the radar.” We typically invest across 30 to 50 stocks and concentrate capital toward our highest conviction ideas. As of December 31, 2024, we held 43 positions with our 10 largest investments comprising 52.3% of net assets.

Our principal investment themes with respective weightings (as of December 31, 2024) are as follows:

• Digitization (27.1% of net assets): India’s rising middle class and smartphone penetration (over 700 million and growing) is creating significant opportunities across e-commerce, food tech, digital streaming, and fintech
• Formalization of the Economy (25.1%): Economic reforms are accelerating formalization leading to market share gains for organized, branded players across various industries
• Consumer Finance (19.1%): Low penetration levels; industry poised to grow mid-to high teens over the next several years; well managed private sector players to gain market share
• Global Security/Supply Chain Diversification (12.7%): Tectonic shifts in geopolitics are accelerating supply chain diversification (ex-China); significant opportunity for Indian players to gain market share in global supply chains
• Power Reforms (7.2%): Market friendly reforms along with growing demand for electricity in India (real estate, manufacturing, data centers, AC penetration) is necessitating a multi-year investment cycle in power generation and transmission
• Financialization of Savings (5.5%): Structural shift in household savings from gold/real estate into financial products such as equities/life insurance savings policies; capital market proxies along with asset managers/life insurers to benefit

We also segment the portfolio based on a S-curve analysis to serve as a form of risk management framework with respective weightings (as of December 31, 2024) as follows:

• Phase 1 (12.7% of net assets): “Under the Radar” or in “Investment Mode” – a phase of market mispricing/time arbitrage and an opportunity for significant alpha generation as these businesses enter Phase 2
• Phase 2 (25.4%): “Disruptors” or “Scale Builders” – this is a period when our holdings should generate non-linear growth and continued alpha capture on price discovery, earnings upgrades, and/or market disruption
• Phase 3 (37.2%): “Compounders” – post scale up, our companies have gained durable competitive moats and are well positioned to compound capital and earnings over the next several years
• Phase 4 (21.4%): "Market Performers/Mature Businesses” – period of stable growth with good earnings visibility; allocation to this segment will be viewed from a risk management / portfolio beta perspective

* Individual weights may not sum to the displayed total due to rounding.

Exposure by Market Cap: The Fund may invest in companies of any market capitalization, and we have generally been broadly diversified across large-, mid-, and small-cap companies, as we believe companies of all sizes in India can exhibit attractive growth potential. At the end of the fourth quarter of 2024, the Fund’s median market cap was $11.6 billion, and we were invested 54.5% in giant-cap companies, 27.0% in large-cap companies, 9.9% in mid-cap companies, and 5.4% in small and micro-cap companies, as defined by Morningstar, with the remainder in cash.

During the fourth quarter, we added two new investments to existing themes while also increasing exposure to several positions based on company specific fundamentals. We strive to concentrate capital toward our highest conviction ideas.

We increased exposure to our digitization theme by initiating a position in Coforge Limited, a leading IT services company in India. In our view, Coforge is uniquely positioned to benefit from structural growth opportunities arising from the multi-year digital transformation of global enterprises. Under CEO Sudhir Singh’s leadership, the company has sharpened its focus on three industry verticals: banking and financial services, insurance, and travel. With deep domain expertise, the company has gained a reputation as a leader in software integration for niche subsegments, such as personal and casualty insurance. Management has also revamped the sales team’s compensation structure to incentivize large deals, providing visibility into sustained growth. The successful turnaround has lifted Coforge from a lackluster, mid-tier IT services company to the top growth quartile. In our view, the merit-based corporate culture and the growth-driven mindset of the management team contribute to the company’s industry-leading employee retention metrics, which is a key driver of superior profitability and returns in the long term. We are excited about the company’s expansion in North America and entry into new industry verticals, bolstered by recent acquisitions. We expect the company to deliver 15% to 20% compounded earnings growth over the next three to five years.

As part of our global security/supply-chain diversification theme, we initiated an investment in Zen Technologies Limited, a leader in defense training systems and anti-drone technologies in India. With strong in-house research and development capabilities, Zen Technologies has been granted over 90 industry-leading patents. Its product portfolio includes virtual simulators for tanks and firearms, and radio frequency-based drone detection and radar tracking systems. Best-in-class technology has helped Zen Technologies build a loyal customer base, with 90% of revenue from repeat purchases. The company has also established a vendor base for simulators and achieved backward integration for counter-drone solutions, leading to strong profit margins. In our view, escalating geopolitical risks around the globe have led to increased interest in controlled environment training and cost-effective solutions, which should drive robust order intake for Zen Technologies. Additionally, the company is uniquely positioned to benefit from the Government of India’s push to develop strong indigenous defense manufacturing capabilities and its preference for domestically developed products. We are also excited about the company’s potential entry into the U.S. market over the next two to three years, as well as its foray into aerial and naval simulators, which should tremendously expand its addressable market. We expect the company to deliver over 30% compounded earnings growth over the next three to five years.

Finally, we added to several of our existing positions during the quarter, most notably Bajaj Finance Limited, ICICI Bank Limited, Bharti Airtel Limited, Max Healthcare Institute Limited, Zomato Limited, InterGlobe Aviation Limited, Aster DM Healthcare Limited, and Mahindra & Mahindra Limited. During the quarter, we also exited positions in CSL Finance Limited and Tube Investments of India Limited due to uncertainties over durability of earnings growth and/or competitive positioning going forward.

We are excited about the multi-decadal growth opportunity that lies ahead for India. Productivity enhancing economic reforms implemented over the past several years are kickstarting a virtuous investment cycle and positioning India as the fastest growing large economy in the world this decade. In our view, India’s roughly $4 trillion economy, growing 6% to 8% in real terms and 10% to 12% in nominal terms, will leap ahead of both Japan and Germany in the next two to three years to become the third largest economy, only trailing the U.S. and China. With the reelection of Prime Minister Modi to a historic third term (next general elections in 2029) and landslide victories for Modi’s Bhartiya Janata Party (BJP) in recent state elections, we expect policy continuity to support sustained economic growth for many years to come.

India is also a key beneficiary of the tectonic shifts in the geopolitical landscape, especially amid rising tensions between the U.S. and China. As the largest English-speaking democracy with growing economic and military ties with the U.S./Europe, India is increasingly being viewed as a strategic counterbalance to a rising China. We expect a further strengthening of the U.S.-India relationship under Trump 2.0, adding to India’s attractiveness as an investment destination. In the aftermath of the pandemic and the war in Ukraine, U.S./European corporates continue to diversify supply chains (ex-China), which has the potential to make India the next global manufacturing hub over time. To support this initiative, India introduced the Performance Linked Incentive (PLI) scheme which offers attractive subsidies (4% to 6% of sales) to incentivize global vendors to establish a manufacturing presence in the country. Apple is a great example that we share with investors. Taking advantage of the PLI scheme, Apple (through its contract manufacturers) is now producing roughly 14% of iPhones in India, up significantly from 1% to 2% levels just three years ago. Production is expected to ramp up to over 25% in the foreseeable future, with recent media articles indicating that AirPods will also be manufactured in India. New (and higher) tariffs on Chinese goods and vendors, if imposed under a Trump presidency, would further accelerate supply chains to move into India and other friendly jurisdictions (i.e. friendshoring). In our view, supply-chain diversification will be a structural trend that should create attractive bottom-up opportunities for long-term investors.

As we enter 2025, we expect increased market volatility, especially related to uncertainties around global trade and tariff hikes as proposed by President-elect Trump. A potential recalibration (i.e. moderation) of the monetary easing cycle by the Fed, given a resilient U.S. economy, is also a key monitorable for developing market equities. While we cannot predict policy outcome, we are confident and excited about our thematic and bottom-up positioning, as many of our holdings will be key beneficiaries of tariffs on countries such as China, Mexico, and Canada. Kaynes Technology India Limited, a leading supplier of mission critical electronic components that competes with Chinese and Southeast Asian vendors, and Shaily Engineering Plastics Limited, a key contract manufacturer for Ikea, both rallied over 35% post Trump’s victory through year end. We expect India’s economic growth to recover toward the second half of 2025 primarily driven by accelerating government spend on productivity enhancing capex that should have a multiplier effect on the economy and drive higher employment. In addition, with the appointment of Sanjay Malhotra as the new governor of the Reserve Bank of India, India’s central bank, we expect a more accommodative monetary policy going forward that should further bolster economic growth. We think investors should consider using any market corrections to build exposure to India, as we cannot be more excited about the long-term potential of the country.

Despite being one of the best performing markets in the world over the last two-plus decades, we believe India’s value creation opportunity is still in the early innings. The MSCI India Index has generated a 9.7% annualized gross return (in U.S. dollars) over the past 25 years as compared to the S&P 500 Index at 7.7% and the MSCI Emerging Markets Index at 6.0%. Put another way, $10,000 invested in India at the turn of the century would now be worth over $101,000 versus the S&P 500 Index at approximately $64,000 and the MSCI Emerging Markets Index at around $43,000.

Thank you for investing in the Baron India Fund.

Sincerely,