Ashwini Agarwal sees value in largecaps, financial services and consumer stocks; avoids IT and OMCs

Ashwini Agarwal, Founder and Partner at Demeter Advisors, believes large-cap stocks offer better return potential than midcaps and smallcaps over the next 12 months, following the recent correction in Indian equity markets.

He sees opportunities in financial services, consumer staples, pharmaceuticals, chemicals and select manufacturing companies, where stock prices have fallen despite businesses continuing to perform.

The recent sell-off has widened the valuation gap between largecap and smallcap stocks, making the former more attractive relative to their earnings growth, Agarwal said.

He added, “On a bottom-up basis, there are still opportunities in the wider market. But on a top-down basis, the chances that you make money on largecaps over the next 12 months are far higher than you will make money in smallcaps at an index level that’s how I think about it. So opportunities exist, but on a top-down basis, largecaps look far more attractive.”

According to Agarwal, the Nifty has delivered annualised returns of around 5% since December 2022, while earnings have grown by about 8% annually. In contrast, the Nifty 250 smallcap index has risen by around 9% annually, against earnings growth of approximately 6%. This suggests that largecap valuations have declined while smallcap valuations have expanded over the same period.

Agarwal believes the correction has created opportunities for long-term investors, particularly in stocks where earnings have improved but valuations have fallen.

However, he cautioned that uncertainty around global energy and transportation costs, along with fluctuations in raw material prices, could affect corporate earnings.

“Staples are giving an entry opportunity,” Agarwal said, pointing to opportunities in consumer staples and tobacco stocks. He believes some of these companies have seen significant corrections, even as their businesses continue to offer value. Strong dividend yields could also provide support to investors in select stocks.

Financial services is another area he favours. Agarwal said earnings in the sector have improved over the past six months, but share prices have not reflected the improvement. Credit quality remains healthy, spreads are stable and liquidity conditions, although tighter recently, remain manageable.

Within financial services, he favours select private-sector banks and non-banking financial companies (NBFCs). He also sees potential in microfinance stocks, where valuations have fallen substantially over the past three to four years. Some companies are trading below their book value, although he acknowledged that drought-related stress could affect parts of the sector.

He also sees opportunities in offline retail, particularly clothing, where valuations have fallen sharply. While the shift towards online shopping has affected the sector, he believes the decline in stock prices has been more severe than the underlying business performance warrants.

Select chemical and pharmaceutical companies have also become attractive following recent corrections. Agarwal believes investors should take a longer-term view of these sectors rather than focus only on near-term concerns around input costs and earnings.

Agarwal remains positive on Indian exporters, including apparel and engineering companies, as well as businesses in chemicals and contract development and manufacturing. He believes expanding export markets and the ability of Indian companies to meet specialised customer requirements could support growth over the next three years.

He is also comfortable holding hospital stocks despite concerns around regulatory intervention and possible price caps. Agarwal argued that hospitals need sustainable returns to attract investment and expand capacity, particularly given India’s shortage of hospital infrastructure.

On information technology services, however, he remains cautious. He said the impact of artificial intelligence on the sector’s business model is still unclear, making it difficult to assess the industry’s long-term earnings outlook.

Agarwal added policy uncertainty remains a key concern for investors in oil marketing companies (OMCs) and gas companies. He noted that oil companies do not have complete freedom to set petrol and diesel prices, which creates uncertainty around their earnings despite fluctuations in crude oil prices.

Agarwal said frequent policy changes across sectors, including hospitals, insurance distribution and brokerage services, have made investors cautious. He stressed the need for a stable policy framework over the next five years, adding that sudden regulatory changes could affect companies’ earnings and investment decisions.

For the entire discussion, watch the accompanying video

Ashwini Agarwal sees value in largecaps, financial services and consumer stocks