PMS Talk: AI, defence and electronics manufacturing are the next growth engines, says Vaibhav Agarwal

India’s next set of wealth creators could emerge from sectors riding structural tailwinds rather than just market momentum. From precision manufacturing and aerospace and defence to electronics manufacturing and AI-linked ancillaries, emerging opportunities are opening up for investors willing to look beyond the obvious.

In this edition of ETMarkets PMS Talk, we speak with Vaibhav Agarwal, Founder & CIO, Accelt Asset Management LLP, about how his team’s bottom-up stock-picking approach identifies businesses capable of delivering sustained earnings growth.

He explains why smallcaps offer opportunities among companies growing earnings at 25–30%, how the GMCV framework — Growth, Management, Capital Efficiency and Valuation — helps separate potential compounders from value traps, and why paying the right price matters even when a business has a compelling growth story. Edited Excerpts -


Q) The Accelt Long Term Equity Fund has delivered 35.48% over one year against a 2.33% decline in the BSE 500 TRI, as of September 30, 2026. What were the biggest drivers of this outperformance? In September as well it stood out one of strong performing funds.

A) At Accelt, our focus has always been on identifying companies operating in sectors with tailwinds that are able to grow faster than the industry.

In every market cycle, there are sectors that lead the bull market. In 1997–2000 it was the IT sector; from 2003–08 it was infra and real estate; from 2014–19 it was consumption and quality; and from 2020–24 it was PSUs, defence, railways and capital goods.

We believe the current cycle is led by precision manufacturing, aerospace and defence, electronics manufacturing and the AI ancillary space. We have been able to find companies in these sectors growing earnings at more than 25–30%, and we got into many of them before they became fancied and obvious.

For example, one of our largest holdings currently is GNG Electronics, which benefits indirectly from rising
memory prices. There is a memory shortage because most of the supply is being redirected towards AI capex, leaving less for consumer electronics. As a result, laptop prices have increased sharply over the last year, which has driven higher demand for refurbished laptops, a segment where GNG is the market leader.

If you look at the headline indices, markets have been rangebound for the last two years. But someone who is willing to work hard at identifying stocks on a bottom-up basis can still create alpha.

Q) The portfolio is predominantly smallcap, with 80.2% allocated to smallcaps. What gives you the confidence to maintain such a strong tilt towards this segment?

A) We are market-cap agnostic. We prefer companies that can grow earnings at more than 20% CAGR over the next three years. Large caps are growing at low double digits, which does not excite us. In the smallcap segment, we are seeing many companies with earnings growth of 25–30%.

There are more than 5,000 companies in the smallcap segment, and putting them all in the same bucket does not make sense. At Accelt, our aim is to find businesses that can deliver high earnings growth, along with the predictability that this growth will continue for a sustained period.

Also, many emerging sectors, like aerospace and defence, are still nascent. The companies are small today but have the tailwinds to become large over the next decade.

Read more: PMS Talk: How Rs 50 lakh invested in Karma Capital in 2006 grew to Rs 5.4 crore

Q) How do you distinguish between a company that is temporarily benefiting from a favourable business cycle and one that can compound earnings over the next five to ten years?

A) It has become increasingly difficult to estimate earnings over a 5–10 year period. Businesses are getting disrupted very quickly by newer technologies like AI and robotics. For example, 10 years ago distribution was a big moat for FMCG companies. But with the advent of quick commerce and e-commerce, access to distribution has been democratised, and even smaller D2C brands have captured a lot of growth from the bigger players.

The same thing has happened in the QSR space, where many newer brands have mushroomed over the last few years and gained market share from the larger players.

That said, there are a few signs we look for. Is the company gaining market share, or is it just riding industry growth? Is ROCE improving as it grows? And is growth coming from new products and new customers, or only from price increases in a favourable cycle? A company that ticks these boxes is more likely to keep compounding even after the cycle turns.

So, when we evaluate companies, we forecast earnings for the next 2–3 years only. If the management is able to execute and earnings growth sustains, we are happy to hold on.

Q) Could you walk us through the GMCV framework and explain how a company must score across these four parameters before it qualifies for the portfolio?

A) G – Growth: A large addressable market in a sector with tailwinds. The company should grow earnings faster than the industry and gain market share over time because of a differentiating factor, be it being the lowest-cost producer, having network effects, etc.

M – Management: You have to look at the past track record to judge whether the management is competent and hungry, and does not shortchange the interests of minority shareholders. We also check whether the management has allocated capital in a way that creates value for shareholders.

C – Capital efficiency: ROCE and ROE sustainably above 20% (well above India’s ~12% cost of capital), without leaning too much on debt or equity dilution.

V – Valuation: Pay a reasonable price for growth. Never buy at any price.

How a stock qualifies: A company has to clear all four filters. A strong score on one cannot make up for a weak score on another. Management is non-negotiable: if we have doubts about governance or capital allocation, we don’t invest, however attractive the growth or valuation looks.

Similarly, if ROCE is not comfortably above the cost of capital, growth does not create enough value and we stay away. Growth decides our level of conviction and hence the position size, while valuation decides the timing.

For example, a specialty chemicals company with high ROCE, a strong promoter and a long growth runway may clear G, M and C. But if it trades at 100 times earnings, even if the growth comes through, a derating can hurt returns. So it goes on our watchlist, and we buy when valuations become reasonable.

On the other hand, a construction company trading at 8 times earnings may look cheap. But if the promoter has a chequered past and profits are not converting into cash, it is a value trap: cheap for a reason. We reject it outright.

Q) How do you assess management quality in smallcap companies, where the operating track record and public disclosures may be more limited than those of largecaps?

A) Firstly, disclosures and coverage of many smallcaps, especially those with market caps of ₹2,000 crore and above, have increased dramatically over the last five years or so. We look at whether the management has delivered on what it said in past con-calls and annual reports, how it has allocated capital, and whether there are red flags like large related-party transactions, frequent auditor changes or high promoter pledging. How a management communicates during a bad quarter also tells you a lot about its character.

Where disclosures or track record are inadequate, we try to connect with the management and do more groundwork, be it plant visits, checks with distributors and channel partners, or conversations with industry experts. However, we invest very little in SMEs and microcaps, where it becomes very difficult to understand the intent and character of the management.

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Q) What valuation metrics do you rely on when a business has strong growth potential but its current earnings may not fully reflect its future opportunity?

A) In our financial model, we forecast earnings for the next 2–3 years and then look at the valuation on a forward P/E, P/B or EV/EBITDA basis. We keep our forecasts conservative and then see whether the valuation is reasonable on a forward multiple.

India has always been a growth market, and good businesses with strong growth potential rarely come cheap. The whole point is not to overpay so much that, even if the growth estimates turn out correct, a big valuation derating results in subpar returns or losses.

For example, DMart traded at more than 100 times earnings after it listed. Its earnings have grown at around 20% CAGR over the last five years, yet the stock is still down roughly 40% from the levels it reached in 2021. Bajaj Finance has delivered only about 4% stock price CAGR over the last five years, compared with a PAT CAGR of around 30%, because valuations were extreme at about 11 times P/B and have since come down to around 5 times.

There are many such examples where one has to be mindful of the valuation one pays. “Buy at any price” surely doesn’t work.

Q) EMS accounts for 14.44% of the portfolio. What structural changes in India's electronics manufacturing ecosystem make this sector attractive, and how do you distinguish durable growth from a temporary order-book boom?

A) Government policy towards electronics manufacturing has been very consistent. The PLI scheme initially focused on assembly, which led to the rise of companies like Dixon in mobiles and Amber and PG Electroplast in ACs. The next focus is components such as display modules and PCBs, with the aim of bringing more design and engineering into India.

Geopolitics is also pushing the world from globalisation towards deglobalisation, where every country wants control over critical supply chains. For 20 years, China was the factory of the world, but the trust deficit among the US, China, Russia and the EU has increased dramatically.

Companies like Apple are now shifting part of their supply chain to India, which is a natural partner given its low labour costs and government incentives. We believe these structural changes will continue for many years.

We see the most growth in components. About 90% of the PCBs used in India are imported, which is a big import-substitution opportunity. Companies that can design and develop components will enjoy multi-year tailwinds, while pure assemblers will struggle to sustain high growth.

To separate durable growth from a temporary order-book boom, we look for rising value addition and margins, a diversified customer base and repeat orders. A company that wins business on design and engineering capabilities is far more durable than one that wins only on capacity.

Q) Your top ten holdings account for 61.4% of the portfolio. What level of conviction must you have before making a position large enough to materially influence overall performance?

A) We normally hold 15–20 stocks at any point in time. Stock prices are ultimately a function of earnings and the P/E multiple. For us, conviction comes from investing in companies that can grow earnings north of 20%, with some predictability that this growth will last for a few years.

Also, when we don’t overpay, the chances of a positive outcome improve. Our largest positions are in companies that score high on all four GMCV parameters and where we have also verified the story on the ground.
Rahul Dravid used to leave the bouncers and yorkers and defend most of the time, but whenever he got a full toss, he would try to score runs.

In investing too, we avoid companies we don’t understand, where managements are unreliable or shady, where the business model itself is in question, where growth is funded heavily by debt or equity dilution, and where return on capital employed is not comfortably above the cost of capital. So, conviction comes from knowing what we know and avoiding FOMO.

Q) Smallcap investing often involves identifying businesses before their growth potential becomes widely recognised. What are the earliest indicators that a company is entering a sustained earnings-compounding phase?

A) Global trends tend to play out in India with a lag. For example, the AI data centre capex boom started in the US, but over time it led to demand in smallcap spaces like power ancillaries, heat exchangers and optical fibre.

One of the most important things is to understand the industry. If a sectoral tailwind is emerging, it can obviously lead to higher growth. For example, high AI demand in the US meant gas turbine manufacturers globally could see bigger order books.

A smallcap company like TD Power supplies components to these turbine makers, so one could anticipate that its demand would eventually improve. When we invested in TD Power earlier, we saw strong demand and order books at its end customers.

One must also track capex. If a company’s fixed assets have increased substantially over the last 2–3 years, it may see accelerated growth once the new capacity goes live. Markets tend to ignore such companies when current earnings are muted due to some temporary headwind. Another early signal is margin expansion. When revenue grows faster than costs, it often shows the business is reaching scale.

Finally, it is important to track promoter buying. The promoter is the best analyst of his own company, and if you see repeated promoter buying, it is worth checking whether there is a catalyst.

Disclaimer: The stocks and companies mentioned in this interview are for illustrative and educational purposes only and should not be construed as a recommendation to buy, sell or hold any security. Accelt holds GNG Electronics in its portfolio and may hold positions in some of the other stocks mentioned. The views expressed are as of the date of this interview and are subject to change. Past performance may or may not be sustained in future. Investments in the securities market are subject to market risks; read all related documents carefully before investing. Readers should consult their financial advisor before making any investment decision.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)