Market now 'valuation-sensitive', time to be a stock-picker, says Ambit's MD Dhiraj Agarwal

The Indian market has entered a phase where it is more 'valuation sensitive' and will operate as a 'stock picker's market', according to Dhiraj Agarwal, Managing Director, Ambit Investment Managers. In an interview with CNBC TV18, Agarwal stated he is now 'cautiously constructive' on the market, expecting it to grind upwards rather than experiencing a sharp rally.

Elaborating on his stance, Agarwal expressed some skepticism about the headline economic data. He pointed to a potential discrepancy in the latest GDP figures, noting that while real GDP growth for the September quarter was reported at 8.3%, the nominal GDP growth was lower than the June quarter at around 8.5%. "Corporate earnings and corporate sales growth actually track nominal more than real," he said. This suggests a possibility that the low deflator might be artificially inflating the real GDP number, said Agarwal. He highlighted that corporate earnings growth remains weak, with Nifty earnings growing just 6-7% and the BSE 500 (excluding OMCs) showing a 7-8% increase for the quarter.

Despite weak earnings, Agarwal identified two significant triggers for his cautious optimism: the recent large GST cut and the continuous decline in interest rates. "Both these put together hopefully result in sustained consumption revival in the second half," he said. However, he tempered this by adding that some of Ambit's channel checks indicate a post-Diwali weakening of demand in certain pockets.

Market has turned 'valuation-sensitive' from 'valuation-agnostic'

The core of Agarwal's argument rests on the market's shift in attitude towards valuations. He contrasted the current environment with the 2018-20 period, where an 'earnings crisis' led investors to chase the few available growth pockets, pushing their valuations to extreme highs. Today, he argued, there is an earnings slowdown but not a crisis. "You are able to find reasonably growing companies at much better valuations today in the market and hence investors are not willing to pay exorbitant valuations for a similar growth or slightly higher growth," he stated.

Using Lenskart as an example, where Ambit has a 'sell' call with a ₹337 target based on valuation, he confirmed the downgrade was a "pure valuation call."

Regarding investment strategy, Agarwal advised a bottom-up approach focused on relative value. In the banking sector, he noted that large banks exhibit similar growth metrics (10-11% credit and earnings growth) and return on equity (ROE) of around 16%. Consequently, he believes investors are better off choosing relatively cheaper stocks. "Which is exactly why names like SBI, Canara, some of the second line banks like Federal, CUBK have been performing significantly better than the frontliners like ICICI, Kotak and HDFC," he reasoned.

This principle, he added, also applies to the IT sector, where a company like LTI has outperformed giants like TCS and Infosys due to better growth. His concluding advice for investors was to move beyond simply buying the largest and best-known companies. Instead, he recommended a strategy of slicing and dicing growth, fundamental metrics like return on capital, and free cash flow generation, and then comparing valuations to identify opportunities for outperformance.