Raamdeo Agrawal: Buy Unpopular Sectors Like Banks Amid AI Disruption
Overview
Raamdeo Agrawal, chairman of Motilal Oswal Financial Services, advocates for a contrarian investment strategy, advising investors to "buy what's unpopular" and "be bullish when markets are bad." He suggests focusing on asset classes and companies with strong narratives, steering clear of sectors like IT due to AI headwinds. Agrawal highlights Indian banking stocks and capital market businesses as areas poised for significant growth, supported by structural economic tailwinds and robust foreign inflows, even as India's overall market valuation remains premium.
Stocks Mentioned
Market Backdrop
India's stock markets are navigating a complex environment with global economic uncertainties and rapid changes in artificial intelligence. Agrawal's strategy focuses on finding undervalued assets and quality companies for the long term. He sees capital markets and banking as strong opportunities, unlike the IT sector where he is cautious.
India's Growth and AI Challenges
Agrawal's investment view is tied to India's strong growth path, which he believes will keep market valuations high. India's wealth creation is growing twice as fast as the global average, but some headwinds temper this optimism. AI has a strong impact, disrupting the IT sector by potentially reducing profits and changing business models. However, AI can also drive future demand and efficiency in other areas.
Motilal Oswal Financial Services itself has a market valuation of around ₹45,567 Cr to ₹48,224 Cr. This shows a market that recognizes growth potential but requires careful sector choices. Motilal Oswal itself trades at a P/E ratio of about 19-22x, a level that calls for companies to show steady earnings growth.
Banking and Capital Markets: Strong Opportunities
Agrawal is confident in the banking sector due to greatly improved fundamentals. Indian banks now have historically low gross Non-Performing Asset (NPA) ratios, reported as low as 2.8% to 3.1%. This stability, along with policy consistency and digital advancements, has attracted significant foreign investment, with inflows reaching over $12 billion in FY25. Major banks like HDFC Bank, ICICI Bank, and SBI are seen as key beneficiaries.
Meanwhile, the capital markets business is expected to grow rapidly. This growth is driven by households shifting savings from physical assets to financial products. Assets under management are projected to reach ₹309 trillion by FY35. Market infrastructure firms and asset management companies are well-positioned for this trend.
IT Sector Faces AI Headwinds
However, the IT sector faces significant uncertainty. While AI is included in business proposals and makes up a small but growing part of industry revenue (estimated at 3-4% in FY26), advanced AI models pose disruption risks in the near to medium term. Reports indicate AI-driven coding improvements could create a 3-3.5% annual growth challenge for the industry, leading to pricing pressure and lower valuation multiples. Companies heavily involved in application services are considered more vulnerable.
India's Premium Valuation Justified?
Agrawal agrees that India will likely "remain expensive" because of its strong underlying growth story. This high valuation highlights the importance of his QGLP (Quality, Growth, Longevity, and Price) method, stressing that price alone isn't enough without a strong company narrative. A surge in Domestic Institutional Investor (DII) flows also shows a growing investor base and a more mature market.
Potential Risks and Challenges
Despite positive trends in banking and capital markets, significant risks remain. The geopolitical situation in West Asia could modestly increase bank NPAs by 0.10% to 0.20%, impacting MSMEs and export sectors. This could slow profitability and credit growth. High valuations in some capital market segments also make them vulnerable to corrections if earnings weaken or global liquidity tightens. For the IT sector, AI-driven disintermediation and automation pose a fundamental threat to revenue models and jobs. Agrawal's contrarian strategy, while potentially profitable, involves betting against current market sentiment, carrying its own risks of being wrong or early.
Long-Term Prospects and Investor Advice
Agrawal expects India's wealth creation to continue, potentially reaching 500 million investors. He advises new investors to see market volatility as a normal part of wealth creation. While long-term investing is key, he also emphasizes disciplined profit-booking using the QGLP method. The core strategy remains finding quality businesses with long-term growth potential at a good price, a method he believes will keep working as India grows economically.
