The Indian equity market is riding high, and the valuations are stretched. In the thick of it all, Niket Shah, Chief Investment Officer at Motilal Oswal Asset Management, is hunting for opportunities—but with caution. Shah manages Rs 59,000 crore across 10 funds, including the four-star-rated Motilal Oswal Flexi Cap Fund and the five-star-rated Midcap Fund. His approach? Backing quality businesses early, staying ahead of the crowd and knowing when to say no.
In this interaction, Shah opens up about why finding value is getting harder, how he’s navigating elevated valuations and the themes and ideas that could still deliver in a market where easy wins are harder to come by. Below is the edited transcript of the interview.
Indian equity markets have experienced a sharp rally, particularly in mid- and small-cap stocks. Do you believe we're entering a frothy zone, or do fundamentals back this?
I wouldn't say we are entering a frothy zone just yet. Yes, valuations are expensive; there's no doubt about that. But I don't think we're in bubble territory where a crash seems imminent. So, while markets are certainly not cheap, they're also not in a euphoric zone where fundamentals are entirely disconnected.
That said, it has become increasingly difficult to find value. Opportunities exist, but they are fewer and more scattered. There are still pockets of growth and areas where the market hasn't fully priced in potential – that's where we're focusing our efforts.
However, compared to the past four years, finding ideas and identifying themes has become much more challenging. Earlier, strong earnings growth and relatively reasonable valuations made stockpicking easier. Now, with earnings growth moderating and valuations elevated across segments, generating the kind of returns we saw in recent years may become more challenging in the future.
Do you see earnings growth justifying current market levels? Are we entering a phase of earnings-led rally or sentiment-led euphoria?
I don't think this is an earnings-led rally at the moment. In fact, we've seen earnings downgrades over the last two quarters – both for FY26 and FY27 – across the Nifty, mid-cap and small-cap segments. So, it's unlikely that we'll see meaningful earnings upgrades over the next three to four quarters.
However, what's interesting is that from the second quarter of this year, the base effect will start to work in our favour. Compared to the previous quarters, where the base was quite high, especially given the strong pre-election government capex last year, this year's base is relatively lower. That sets the stage for better-reported growth.
This also aligns with the significant liquidity infusion by the RBI, which typically has a lagged impact. Liquidity injections don't translate into economic momentum overnight; they take a quarter or two to filter through. Our view is that this lag will begin to play out in the second half of the year, and it's then that we could see the market responding more positively.
Your portfolios reflect a high-conviction, differentiated approach. How would you define your overall investment style? What are the key factors you look for when picking a stock?
I believe we adhere to the QGLP philosophy, which entails acquiring high-quality businesses with strong growth potential. Typically, for us, about 20 to 25 per cent growth is something we continue to enjoy.
And like the 'L' stands for longevity of growth, we consciously avoid cyclicals by design, and hence, I think more structural stories are something that we prefer. 'P' stands for 'price', which is essentially the reason why I'm highlighting it more in the current context, where valuations are quite high. The only way to get the stocks right is if you're ahead of the curve. If you're not ahead of the curve, it's quite difficult to make enough and more stock selections from a price perspective. So, you have to be early in the theme where it's undiscovered, and that's where you get the valuation point right. That's one thing we continue to do.
The second thing we continue to do is focus on companies where the size of the opportunity is very large and try to be early in that curve. We look at inflexion points—anything changing around the company, whether within the organisation or in its external environment—that’s helping it grow faster. We also examine industry growth and, within the industry, identify companies that are growing at a faster pace. Are they gaining or losing market share?
Last but not least, it's just cash flows, P&L and the balance sheet, but a higher focus on cash flows is how we would broadly summarise what we try to do.
How much weight do benchmarks hold in your allocation calls across categories?
We are very mindful of our benchmarks, whether it's sector benchmarks or stock-level benchmarks within sectors. That said, if we come across an opportunity where we genuinely believe we've struck gold, we don't hesitate. We go straight for a 9.9 per cent allocation – that's the maximum SEBI allows.
However, reaching the 9.9 per cent level requires tremendous conviction, which in turn demands deep, firsthand research. You can't make those decisions based on borrowed conviction or a sell-side research report. If you're not on top of the subject, you'll always hesitate. True conviction comes only when you've done the hard work yourself.
For instance, in cases where I haven't personally spent enough time on a company, even if a colleague has done a great job, I may only allocate 3-4 per cent of the portfolio. However, in cases like the food delivery business, where I was closely involved, did detailed work and was on the ground – riding with delivery agents in Mumbai and Delhi – that level of granular understanding gave me the confidence to take on bigger challenges.
So, ultimately, conviction drives allocation. And conviction is built through rigorous, independent research, not external opinion.
A consistent mid-cap tilt is visible even in your flexi-cap and large-cap funds. Can you walk us through the thought process behind this positioning?
Sure. Fundamentally, many companies with market caps of Rs 80,000 to Rs 90,000 crore are still classified as 'mid caps'. However, a few years ago, these would have been considered large caps. So, in many ways, these are what I'd call 'larger mid caps', and that's where we find a sweet spot for some of our large-cap strategies.
These companies, often generating profits exceeding Rs 2,000 crore, have the potential to grow at a faster pace than businesses already earning Rs 5,000 to Rs 7,000 crore in profits. That's the core idea: we go one step below the traditional large-cap layer without compromising on quality to capture higher earnings growth in the portfolio.
When it comes to small caps, we've always been highly selective. We generally invest in small caps only when there's a very strong thematic story playing out, where we believe we've truly 'struck gold'. You'll see this reflected in our multi-cap or business cycle funds. Those small-cap allocations are always deeply researched and theme-driven.
Because small-cap stocks are illiquid, you don't get a second chance if something goes wrong. So, we only enter them when we have high conviction backed by rigorous due diligence. If we're not sure, we'd rather stay in larger or smaller mid caps where we can still capture growth with better exit optionality.
How do you approach diversification across sectors when your portfolio is already concentrated in a few stocks?
The way we look at it is pretty straightforward. We first take a sector or thematic call. It's critical to determine whether that sector or theme is likely to do well for the year. Once we have conviction on the broader opportunity, we go one level deeper: What within that sector do we want to own?
For example, let's say we're bullish on the IT sector. Now, within IT, there are four major companies: A, B, C and D. All of them may be expected to deliver a 20 per cent increase, but two could deliver 30 per cent. I want to own those two. Simple.
We focus a disproportionate amount of our energy on identifying the highest-returning stocks within a sector or theme. That becomes our positioning. It's not that the others are bad; they may also do well simply because the sector is in a tailwind. However, if we can identify the leaders in terms of return potential, those are the ones we want in the portfolio.
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