'Growth and the quality of growth come much before valuations'

If you are a growth investor, one of the fundamental principles to focus on is the GARP (growth at a reasonable price) philosophy. And who better to learn about it than from Ashutosh Bhargava, Fund Manager and Head of Equity Research at Nippon India Mutual Fund? Bhargava is a well-known GARP investor who has perfected his skills over the last 17 years. In this interview, he discusses the fundamentals of building a GARP-based portfolio, long-term trends to bet on and how GenZ can develop their portfolios. As a GARP investor, how do you balance growth and valuation? Valuations are essential, but for us, growth and the quality of growth come much before valuations. In some ways, valuation multiples are beta to earnings. Whenever earnings change trajectory, it compels consensus to change their earnings estimates. That's where multi-rating/derating happens. The trick is identifying the right sectors with strong macro tailwinds and a favourable industry microstructure. That's where the pricing power comes from and where the sweet spot lies. How much to pay for such opportunities is a far trickier part because that depends on overall investors' sentiment, flows and the valuations other market segments are trading at. Valuations help us identify overreaction to either side, but basing the judgement solely on historical valuation ranges doesn't always help. Having said that, we should not lose sight of what long-term growth is being priced in to ascertain whether valuations are becoming unjustifiable. Where do you draw the line between good and bad growth? I focus a lot on quantitative factors to judge the quality of growth. Factors include a view on leverage, cash flows and changes in operating efficiencies, which have a bearing on profitability. The idea is to identify pockets of sustainable growth versus a flash i