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How To Pick The Next Winning Stock? Girik Capital Has A Suggestion

Track earnings to find the winning stock, says Girik Capital.

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Macros are very hard to predict as they are too high in the sky, and hence, keeping track of earnings progression is a way of moving forward, according to Girik Capital's Charandeep Singh.

"What matters most is the source of the outsized earnings growth," Singh, co-founder and fund manager at Girik Capital, told BQ Prime's Niraj Shah.

Earnings in India seem to be positive with no nasty surprises, said Singh, who expects earnings to exceed expectations in the next couple of years. Varun Daga, Singh's fellow co-founder and fund manager, concurs.

Capital Goods, Industrials To Emerge As New Leaders

Every bull market starts with a new leader, Daga said. "For example, financials, I.T., and consumer stocks led the bull market in the past decade, while industrials and PSUs led the market between 2004 and 2007."

In the last couple of years, India has slowly shown signs of a revival of the capex cycle, he said. "Capital goods and industrials, which haven't done well in the last decade or so, are likely to emerge as the new pillars."

"Elevated multiples would remain, especially if there is an acceleration in growth," Daga said. "Focus on companies that are well run, high in quality, and that can grow at an accelerated pace."

According to Singh, what does well is what is typically under-owned, and "exorbitant ownership becomes a headwind for equities and not a tailwind".

Key Themes

Auto, financials, and I.T. services are the three key themes, according to the co-founders of Girik Capital.

Auto

The auto sector experienced a lot of headwinds in the past couple of years, especially due to factors such as Covid, the acceleration in inflation, and the chip shortage, said Daga. However, these deterrents seem to be easing at present, with demand slowly picking up. Therefore, the next few years should be great for autos, especially the premium segment, or UVs and SUVs, with an increase in disposable income and the desire for better quality, he said.

Secular volume growth is needed for continuous stock price appreciation, according to Singh, which hasn't been the case with the whole auto sector in the past decade, except for the premium segment.

How To Pick The Next Winning Stock? Girik Capital Has A Suggestion

Financials

Financials are too vast now in India with private and public sector banks, small private lenders, old private sector banks, NBFCs, life and general insurers, and asset management and distribution companies, all cramped in the space, Singh said.

But from a long-term perspective, the distribution looks profitable, he said, with State Bank of India and Axis Bank Ltd. looking attractive in the field.

IT Services

In the I.T. services space, despite going through earnings acceleration, margins have peaked as demand increased with a decrease in cost, and multiples have consequently contracted, which has in turn slowed down earnings acceleration, Daga said. This does not make the space very sustainable from a long-term investment point of view, he said.

The markets want to see clear visibility of cash flow and earnings, which only makes those companies attractive that can turn profitable sooner rather than later, he said.

Watch the full interview here: