The next big alpha in the Indian equity market will most likely come from sectors and companies that can deliver ”high earnings growth for longer” periods, believes Motilal Oswal Asset Management Company CEO Prateek Agrawal.
Speaking about his investment philosophy in a recent interview, Agrawal said investors should focus on spaces where growth can remain higher for an extended period, rather than simply looking for stocks that appear cheap on conventional valuation measures.
He pointed to the software sector in the 1990s and private-sector banks from the early 2000s through 2020 as examples of areas that generated substantial wealth by sustaining strong growth over long periods.
“The combination of high growth sustaining for longer is what is needed,” Agrawal said.
He then spoke about the challenge: Whether it is available or not?
According to Agrawal, the market has now changed. Between 2011 and 2020, generating alpha was difficult, with large-cap stocks delivering strong earnings growth and the large-cap index performing among the top quartile.
However, the period following the COVID-19 market bottom has created a different set of opportunities.
The China+1 theme, policy support and renewed focus on domestic manufacturing have created opportunities outside the traditional index. He believes earnings growth outside the index is now significantly higher than what the index is delivering, making this “a time for alpha.”
“I think the growth in earnings that you find outside of index is way higher than what the index is delivering. And that makes it time for alpha,” he said.
Motilal Oswal CEO's Advice To Investors
Agrawal also described the current market as a period of disruption, with several industries witnessing the emergence of companies that were either much smaller or did not exist a decade ago. He cited new-age and platform companies, technology businesses, electric vehicle companies and online brokers as examples.
For investors looking for alpha, the challenge is not simply identifying high-growth companies but determining whether that growth can continue for several years. Agrawal said most market participants typically project earnings only two years ahead and assume growth will subsequently slow.
“The trick there is the longevity of growth,” he said, adding that investors should identify narrow spaces where growth can sustain for longer.
If a company's growth remains strong for four years rather than just two, its valuation could appear more reasonable when the longer earnings runway is taken into account.
“Find narrow spaces where growth can sustain for longer, identify the companies best positioned in those spaces, and back them with conviction,” he added.
He also cautioned that such a strategy will not deliver consistent performance every year. Investors should expect higher volatility and remain invested for the long term.
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