Why banking doesn't excite Niket Shah anymore

In a market reaching new highs, finding value becomes challenging. Niket Shah, Chief Investment Officer at Motilal Oswal Mutual Fund, shares his proven strategy for identifying multibagger stocks and businesses with strong compounding potential. Every investor has a unique style. Could you walk us through your investment approach? What kind of market environments do you find most exciting or opportunistic? From the outset, my focus has been primarily on growth rather than value. Fundamentally, the first thing that we look at is the size of the opportunity of the business and the industry where it is present. This is the primary criterion, as achieving 10 or 20 times returns on stocks requires a sufficiently large and continuously growing pool. For instance, the air conditioning industry in India may seem substantial from an external perspective. But if you look at the profit pools of the companies, it's less than Rs 1,200 crore. On the other hand, the profit pool is very large if you look at capital goods, manufacturing, or IT companies. So, when looking at those larger size opportunities, I think the chances of you finding a multibagger are very high. Second is the growth of the industry itself; the industry should grow at a faster pace, and the bare minimum is two times the gross domestic product (GDP). Within that industry, the company you're selecting or looking at should be gaining market share, which means it's growing faster than the industry's growth rate. Fundamentally, market share gain translates into market cap gains over time. The third important parameter we consider is the promoter. Good promoters without a strong business do not contribute significantly. We require a business that is exceptional and has a strong promoter. Fourth, forensic financial analysis emphasises cash flows more than profit and loss (P&L) and the balance sheet. This is because, in the end, what matters most to shareholders are the cash flows. So, if there are companies that don't generate free cash flow, it's typically a red flag for us. Unless they are in an expansion phase or operating in a business that requires two or three years of significant capital expenditure to reach a specific level, they should eventually generate free cash flow. But we have to dive deep into some of those companies with negative free cash flow, which is quite important for us from a quality of business stan