What is your assessment of the Indian banking space right now? Let’s focus on the larger banks—SBI with its QIP, and of course, what we’ve seen so far from Axis, HDFC Bank, and ICICI Bank.
Prateek Agrawal: In terms of the composition of their books, the banks are starting to look quite similar. Even in terms of growth, there is a convergence happening. Regarding capitalisation strategies, earlier we used to think that PSUs were reluctant to raise capital—they would wait until the last minute. In contrast, private sector banks raised capital proactively when it was available, which enabled them to grow faster.
Now, for the first time, we’re seeing a PSU bank take that approach, and I believe it will work well for them. In terms of execution, some banks have gone through regime changes, consolidations, mergers, and so they are currently in the assimilation phase. Those that went through this earlier are now having a better run in the market, which is also reflected in their stock performance.
One observation is that today, even though return on assets (ROAs) might vary, return on equity (ROEs) across banks are becoming quite similar. Some may have lower ROAs but higher leverage, especially if they’re seen as government-backed entities. If ROEs are converging, then over time, valuations should also converge—that’s the idea.
Let’s move to your area of expertise—the AMC space. We’ve seen significant investor interest in some of the listed players, and SEBI has been actively pushing the long-term investment agenda. Meanwhile, broking companies are facing their own challenges. From an investor’s perspective, how do you view both these sectors? What’s driving investor interest?
Prateek Agrawal: Let me put it this way—India used to be a country of savers. If people had surpluses, they would put it into fixed deposits across various tenures. Now, India is increasingly becoming a country of investors. Surpluses are flowing into the markets, which supports the entire financial ecosystem.
Brokers facilitate transactions, and AMCs receive the investment inflows. Broking is a transaction-based business and tends to be more volatile. AMCs, on the other hand, operate on an AUM model, which is steadier. So it depends on the investor’s risk appetite—brokers may offer higher growth potential, while AMCs offer stability.As far as AMCs go, we are fortunate that many of the larger players are extremely disciplined. They are managing to grow AUMs while maintaining margins—a very difficult feat. With such a strong top order, the whole industry can grow profitably. Despite being fragmented—the largest AMC only holds about 12–13% market share in equity—the industry remains disciplined. Over the long term, there’s definitely money to be made by investing in good AMCs.Now, looking at brokers—they come in two formats: brick-and-mortar and online. Online brokers that only focus on broking benefit from the influx of new traders and the volume of transactions. But if you look at them as tech platforms, there’s even more potential. They already have a large investor base and can cross-sell products like loans and insurance. Others, like UPI players, have built reach by burning cash; here, these platforms are profitable from the start. If you see them as tech companies, the long-term outlook changes.
Ultimately, it depends on the company’s strategy and how the investor views it. But broadly, we believe capital market plays offer more potential today compared to traditional lenders. That’s a theme you’ll likely find across most of our portfolios.
I was going through your latest note where you’ve said it’s still a time for alpha. Where do you see the potential pockets for alpha generation in this market?
Prateek Agrawal: Our belief is that markets follow earnings growth. To generate alpha, you need sectors where earnings growth can significantly outpace the market over several years.
For example, in the 1990s, software offered such opportunities. Then, from the early 2000s to about five or six years ago, private banks delivered exceptional excess returns. In a similar way, we think capital markets, new tech, electronic manufacturing, and some parts of the defence sector could deliver strong growth. Defence in particular is benefiting from higher spending and indigenisation.
Renewables and emerging sectors like EVs and data centres also have great potential. The common thread across these sectors is that they’re new, high-growth, and not directly tied to the broader economy’s growth, which typically maps to index-level earnings. These sectors can deliver growth far above index averages and sustain that growth for a long time. That combination is what you need to generate alpha.
These opportunities are especially accessible for a mid-sized house like ours. Many of our funds are smaller and more nimble, allowing us to discover and invest in such niches effectively.
