Veteran investor Raamdeo Agrawal's pursuit of 'bruised blue-chips'

Investing in beaten-down high-RoE stocks can be rewarding, says the veteran investor

Being a stock market investor is a constant quest to identify potential multibaggers. While the market continuously presents opportunities, recognising them at the right moment and having the conviction to fully commit is a big challenge. Consequently, only a select few domestic investors have achieved billionaire status solely through their investments.

 

Raamdeo Agrawal’s networth of over $2.5 billion largely draws from the success of Motilal Oswal Financial Services (MOFSL) — now valued at $7 billion — which he co-founded with his friend Motilal Oswal nearly four decades ago as a small securities firm. Yet, beneath his business triumphs lies a passion for stock picking, a skill that remains at his very core.

 

A key part of his approach is the annual wealth creation study, where he identifies and celebrates companies that generate substantial value for their shareholders over a five-year period.

 

We meet Agrawal as he gives finishing touches to the 29th edition of the study — themed around investing in “bruised blue-chips” — based on the book How to Create Wealth Investing in Turnaround Stocks by Bruce Berger. He hastens to explain: blue-chips are stocks from the top 250 universe with a 10-year average return on equity (RoE) in excess of 20 per cent. (Some top wealth creators don’t meet the RoE filter but are included due to their sheer size). A 50 per cent fall from their highs makes them “bruised blue-chips”.

 

While Agrawal emphasises investing is “more art than science”, timely wagers on “bruised blue-chips” have consistently proven rewarding. The market has presented an average of 40 such companies annually since 2018. The inherent strength of these companies often leads to compelling turnaround stories. Notable examples mentioned in the study include Cummins India, Bank of Baroda, Mahindra & Mahindra, Glenmark Pharma, Shriram Finance, and NTPC — all of which saw their stock prices decline by over 50 per cent from their peaks, yet investing at these low points has yielded major returns. 

 

Agrawal explained that “bruised blue-chips” often face punishment due to internal and external causes. Internal issues include factors like capital misallocation, poor management strategies, or deterioration in financial performance. External factors can be a sector slowdown or a shift in the competitive or regulatory landscape. Despite these challenges, Agrawal argues that blue-chips invariably hold long-term potential.

 

According to Agrawal, the market’s buoyancy in recent years has made “bruised blue-chips” increasingly rare. He points out that a large paint company, which has experienced a 30 per cent decline amid rising competitive pressure from deep-pocketed players, has entered the watchlist.

 

“If this drop extends to 50 per cent, it could present an appealing investment opportunity,” he suggests, cautioning that a premature punt on the stock may not be as fruitful.

 

Throughout the hour-long interview, the 68-year-old frequently references the late Rakesh Jhunjhunwala, admiringly referring to him as the master of identifying bruised blue-chips, almost with a sense of envy. Agrawal points out that Jhunjhunwala’s winning bets on Titan Company, Escorts, and Lupin are prime examples of a “bruised blue-chip” investment strategy that helped him amass wealth of Rs 50,000 crore.

 

According to Agrawal, what set Jhunjhunwala apart was his boldness in allocating a substantial portion of his portfolio — 10-15 per cent — to such stocks.

 

  Turning shark

 

While Agrawal is predominantly known for his investments in the listed universe, he has started exploring the startup ecosystem, actively engaging with startup pitches. He has already backed leading food delivery and quick-commerce firms Zepto, Swiggy, and Zomato — both in a personal capacity and through MOFSL.

 

Agrawal projects these companies to grow at an annual rate of 70-80 per cent over the next five years.

 

The core of his investment thesis is based on the massive shift occurring in the $600 billion food and grocery retail market, which is increasingly moving from traditional offline shopping to quick commerce.

 

Agrawal says it’s difficult to predict the exact extent of this shift, but even a 15 per cent shift in consumer behaviour could create a $100 billion opportunity — largely to be shared by the trio of quick commerce firms he has invested in. Agrawal projects 20x returns on his investments over the next 10 years.