Motilal Oswal’s Gautam Duggad on his latest stock picks and market outlook

Over the years, Gautam Duggad, head of research (institutional equities) at Motilal Oswal Financial Services Ltd, and his team have built a track record of identifying lucrative investment opportunities and avoiding non-performers. Duggad shares his thoughts on the markets, economy, sectors, and the latest changes in the Motilal Oswal model portfolio.

Among new additions in the Motilal Oswal model portfolio is Kotak Mahindra Bank Ltd, reflecting Duggad optimism about the banking, financial services and insurance, or BFSI, sector.

The avoid list is long. In fact, the Motilal Oswal model portfolio has seen 13 stocks make a complete exit, including Avenue Supermarts Ltd (DMart) and Sobha Ltd. 

Edited excerpts from an interview with Duggad.

What’s your reading of the stock market? Where do you think it could be headed in the near, medium, and long-term? 

The market looks evenly poised as far as large-caps are concerned. Nifty-50 delivered an 18% earnings CAGR (compound annual growth rate) and an 18% market-cap CAGR from 2018-19 to 2023-24. However, mid- and small-caps are trading at expensive valuations. 

In the near term, we expect some consolidation in markets for all segments as earnings are taking a breather in FY25 after four consecutive years of very solid performance. For the medium- to long-term, we believe India is most attractively placed on macro-micro parameters and thus expect good mid-teen returns.

In which sectors do you see a lot of value? Which sectors are you tracking closely for a possible investment opportunity?

We find value in the BFSI sector. It is the only sector that has seen de-rating in the last five years. Balance sheets have been very robust, with asset quality at its best in the last two decades, barring companies with big MFI (microfinance institutions) exposure.

Consumer staples have underperformed in the last four years, and thus, valuations have fallen from the highs. Growth has also softened. 

We also find value in technology and healthcare. We are overweight on BFSI, technology, consumer discretionary, healthcare, industrials, and real estate in our model portfolio.

Which sectors would you generally avoid in these times? 

We are currently underweight on metals, oil and gas, cement, defence, and automobiles. Our portfolio choices are dictated by a blend of earnings growth visibility, balance sheet/cash flow characteristics, and growth-adjusted valuations.

Which stocks have you added to your model portfolio recently or increased their weight in your model portfolio? And which stocks have you exited?

Here are the key stock changes in our model portfolio from the October preview:

New additions: Kotak Mahindra Bank, HDFC Life Insurance Company, Power Grid Corporation of India, TVS Motors, Tata Steel, Five-Star Business Finance, Coforge, Dixon Technologies, Medanta (Global Health)

Weight increase: ICICI Bank, HDFC Bank, Larsen and Toubro, Infosys, HCL Technologies, Mankind Pharma, Angel One, Metro Brands, Cello World

Weight reduction: Reliance Industries

Stocks exiting the model portfolio: Axis Bank, AU Small Finance Bank, Cholamandalam Financial Holdings, Bank of Baroda, DMart (Avenue Supermarts), Godrej Consumer Products, Kalyan Jewellers India, Restaurant Brands Asia, Bharat Electronics, Max Healthcare Institute, Ashok Leyland, Hindalco Industries, and Sobha

What are you most excited about and most anxious about when it comes to the future of India? 

We are most excited about the big picture opportunity that India offers on growth. We are also enthused by the solid balance sheet management by the government of India and RBI (Reserve Bank of India). 

The volatility in macro indicators has reduced considerably over the last decade. The combo of high growth, manageable inflation, healthy CAD-FD (current account deficit-fiscal deficit) combo, stable currency, rising forex (foreign exchange) reserves, and healthy corporate earnings puts India in a very unique spot in a world where growth is scarce and headwinds persist around geopolitical challenges. 

The host of macro reforms undertaken by the government over the last decade, the push for digitisation, and massive infrastructure creation have put a solid foundation for a multi-decade robust economic growth. 

But we are anxious about execution risks, lack of political will for reforms in case of a fractured mandate in the next Lok Sabha election in 2029, and any big global macro shock.

If you had fresh money, how would you invest it in the stock market in these times?

I will invest it in a staggered manner in identified stocks and mutual funds with a minimum horizon of five years.

Could you recommend a book that you recently read? 

‘Masterclass with Super-Investors’ by Vishal Mittal. We have seen and read many books that trace the journey of global, well-heralded investors such as Warren Buffet, Charlie Munger, and Peter Lynch. This book highlights the stories of our very own Indian investors and provides a peek into how they went about creating wealth over decades, with very relatable examples and experiences.