Large caps set to deliver; annual market returns could be 12-14%: Raamdeo Agrawal

Mumbai: Large-cap stocks are poised to outperform over the next few years, believes Motilal Oswal Financial Services' chairman Raamdeo Agrawal. "The past five years belonged to midcaps, and the next five years will be of large caps," he said in an interview ahead of the release of the firm's annual wealth creation study. "When the tide turns, the large caps will move. Now probably is the time when large caps will start doing better over the next 4-5 years."

Agrawal expects the market to deliver annual returns of 12% to 14% from equities. He noted that even expensive stocks could still generate returns of around 12%.

Top investment themes

Agrawal identified autos and capital markets as key beneficiaries of India's economic expansion. "The economy moved from bicycles to motorcycles around 1990. Now the tipping point is from motorcycles to cars," he said, adding that the 28% to 18% tax cut will help big time. "China went through the same phase in 2008. They used to have 3-4 million cars; now they produce 25 million cars," he said.

Among auto stocks, Eicher Motors, Hero Moto Corp, M&M, and Maruti are his top bets.

Within capital markets, 360 One, HDFC AMC, BSE, Nuvama Wealth, MCX and in finance and banks, HDFC Bank, ICICI Bank, SBI, AU Small Finance, will do well, he said.

Wealth creators
In the firm's latest study, the 10 fastest wealth creators are led by BSE with a 124% compounded annual return between 2020 and 2025, followed by Adani Enterprises, Hindustan Aeronautics, Bharat Electronics, Persistent Systems, Rail Vikas, Indian Bank, Varun Beverages, Trent and Jindal Steel.

The study has highlighted the importance of taking valuations into account while investing. Seven of the top ten consistent wealth creators in the past five years were trading at a single-digit Price to Earnings (PE) ratio in March 2020 at the onset of the Covid-led pandemic.

"...Sharp market corrections offer even healthy companies at attractive valuations. Buying into them leads to Consistent Wealth Creation for a long period," the study said. "Just like low P/Es are buying opportunities, frothy P/Es are highly profitable and unmissable selling opportunities."

Giants Underperform
Similarly, top companies like Reliance Industries, HDFC Bank, TCS and Infosys are not among the top wealth creators because they have been underperforming the benchmark Nifty Total Return Index. "This suggests that market cap giants are likely to struggle to outperform the market given the high-base effect," said Agrawal.

Indigo Buy Call
Agrawal said the recent drop in shares of InterGlobe Aviation, parent of Indigo, following the mass flight cancellations, is the right time to accumulate the stock.