Raamdeo Agrawal says he is going to make money on ‘bruised blue chip’ Asian Paints this time

There is one company that market veteran Raamdeo Agrawal sorely misses not investing in at the right time: Asian Paints Ltd. “It is really iconic. I missed it three times. I am watching it from the 1980s and I have still not made a single penny out of it. But this time, I think I am going to make money.”

Agrawal is now banking on his “bruised blue chips” theory—or investing in quality, large companies when they go through a lean patch—to buy into India’s largest paintmaker. “Nothing comes to my mind which is that bruised a blue chip besides Asian Paints,” he said, referring to a near 30% year-to-date decline in the shares of Asian Paints as India’s consumption growth eased.

Every December, after unveiling his wealth-creation study, Agrawal treats himself to a two-week break. Before this year’s vacation, the chairman and cofounder of Motilal Oswal Financial Services sat down with Mint at his office in Mumbai’s Prabhadevi to discuss the 2024 edition.

Agrawal explained that there are pitfalls to this theory of chasing bruised blue chips. “That's when your judgment comes in—whether the company will survive first, and then whether it will prosper.”

Reflecting on how his earlier strategy differed from that of his late friend Rakesh Jhunjhunwala’s, he said, “I always wanted to buy blue chips in good shape, so I used to pay full price.”

But the beauty of buying a bruised blue chip is that the downside is limited, while the upside is unlimited, he said. It all depends on a bit of luck and brilliance in choosing the right stock, Agrawal said.

Edited excerpts:

At a time when most market mavens are touting blue chips as a safety net, your wealth creation report is titled, ‘Creating Wealth Through Bruised Blue Chips’. What is your key to profiting from these blue chips, and what is the outcome that you expect in terms of returns?

There are a few aspects to consider here. First, how do we define blue chips? Traditionally, blue chips are well-established, large corporations known for their leadership, stability, and consistent performance. For our analysis, we’ve defined blue chips as the top 50 NIFTY companies or those with an average return on equity (ROE) of over 20% for the past 10 years. This is a stringent criterion. Essentially, companies that meet both size and profitability benchmarks qualify as blue chips.

From a pool of the top 250 companies, we identified 107 that meet these criteria, showcasing stability and a competitive edge. However, no blue-chip company is immune to challenges. Every company experiences rough patches—what we call “bruising times”. These bruises can stem from internal issues, external factors, or overall market downturns. During such periods, stock prices can drop significantly—sometimes by 50%, 60%, or even 70%.

For example, a stock priced at ₹100 could fall to ₹30, ₹40, or ₹50 during a market downturn. This creates an opportunity for asymmetric payoffs. If a ₹100 stock drops to ₹50 and eventually recovers to its original price, it doubles in value. Over two years, that equates to a 40% annualized return; over three years, it’s around 25%. If the stock falls by 75% (to ₹25) and recovers, it can triple, offering even greater returns over three to four years.

This dynamic provides both time for recovery and the potential for attractive returns—ranging from 25% to 50% annually, depending on when you invest and a bit of luck.

While there is no exact formula, the trick is to buy when the stock is near its point of maximum pessimism. Since these are blue chips, they are unlikely to die, ensuring your money remains relatively safe.

The downside risk is minimal, but the potential for an asymmetric upside is huge. That is the strategy we are highlighting.

The report mentions that financials are both the biggest wealth destroyer and the largest wealth creator. This is particularly intriguing since financials are being viewed as a major theme for 2025. Could you shed some light on this?

Yes, this study addresses that as well. The “bruising” aspect is thematic, so let’s not confuse it with your current question—it’s a separate subject altogether. What you’re asking about relates to the last five years. During that period, ICICI and several other large banks generated substantial wealth. At the same time, there were banks that faced significant challenges—some even collapsed. For example, two or three banks lost a considerable amount of money, with losses reaching ₹60,000-70,000 crore. So, within the banking sector, you had both major wealth creators and notable wealth destroyers. This kind of dynamic is always a possibility.

You very early on identified Hero MotoCorp as a blue-chip opportunity. In today’s market, do you see similar return potential in any of the newly listed companies or those heading for an IPO?

Back in the '90s, markets were very young, small, and quite cheap. Institutional investors were few, mutual funds were practically non-existent, and investing was largely an individual pursuit. This made the markets reasonably priced and filled with opportunities. Today, while there are still ideas to explore, the landscape has evolved significantly.

Markets now are much more developed, with complex and liquid entities like insurance companies adding layers of efficiency. The deep undervaluation seen in the mid-'90s is rare to find today. Back then, it was possible to identify iconic leadership companies with high ROEs of 25-30% at very attractive valuations—for example, companies valued at just ₹1,000 crore with profits exceeding ₹100 crore.

Such opportunities are much harder to come by in today’s market, which is far more competitive and efficient. It is no longer as easy to identify those iconic leadership companies as it was in 1995-96. Markets are not that easy.

With Sebi’s recent announcements on tightening F&O regulations, do you think that could lead to money moving from F&O to cash market?

Unlikely. While I’d like to see it happen, I don’t think it’s realistic because the two markets attract entirely different mindsets. Those in the F&O market are typically impatient, seeking quick gains, often within hours. In contrast, cash market investors are much more patient, willing to hold their investments for two, three, or even four years. At best, there might be a marginal shift, but I don’t see a significant movement happening.

Do you expect more regulatory action, considering that a majority of retail traders earn less than ₹5 lakh per year?

Ultimately, traders need to fend for themselves as they face the unchecked expansion of this activity. The regulators have already taken strong actions, particularly with the monthly expiries, which have reduced the fees in the market. Volumes are likely down 30-40%, maybe even 50%. While regulators can impose tighter rules, such as controlling expiries, margins, and what can or cannot be traded, I don’t believe they can determine the fortunes of traders.

You play an active role in one of India’s leading retail stockbroking and AMC businesses. Given that, do you find it concerning that retail investors are increasingly opting for equities as their preferred asset class? Is this trend something you are worried about?

Why should I be concerned if it’s an opportunity to expand the market? The more, the merrier. We’re gaining three to four million customers every month, which just keeps growing the market. This allows for more trading, more issuance, and more wealth management. Even though each customer may bring in a small amount of money, it’s still expanding the pie, and all players in the market should be happy about that.

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There’s no concern about the euphoria surrounding the rise of retail investors. The market is buoyant, which is why we can withstand strong selling phases. In fact, it’s become a much more resilient market. It doesn’t dip as easily anymore—while how much it will rise is another story—but at least it’s much more solid and stable now, which is a positive sign.

You have said earlier that foreign investors can pivot to China or Korea, and if they reenter India there would be a hefty premium to that—perhaps when Nifty is at maybe 30,000. In your view, what would prompt FIIs to come back to India at such elevated levels?

I believe if corporate earnings grow by 15-20%, foreign investors will return to India. There’s no doubt they will eventually come back. As global allocations to India decrease and the market rises, they will need to allocate more to India, especially since we represent only about 3.5% of global market cap. Their allocations might still be around 1-2%, so there’s room for more investment.

However, I am worried that so much money is currently flowing into the US, which represents about 75% of the global market cap. US markets remain strong, drawing capital from around the world. Meanwhile, Indian capital largely stays within the country because we are not allowed to send it out. Despite this, India will continue to perform well thanks to its domestic investors, even if foreign investors are selling.

At some point, the tide will shift, and foreign investors will want to come back and participate in the Indian market. By then, domestic investors will already be active. Foreign investors often prefer to buy when domestic investors are selling, but currently, domestic investors are consistently buying, even when foreigners are selling. Once both domestic and foreign investors want to buy, promoters will likely start selling, which will drive prices higher.

You spoke about corporate earnings growth. Given that the economy is slowing; fiscal deficit is widening and private capital expenditure is still lagging expectations, how do you see these things shaping up earnings growth in the coming quarters?

No, I think the authorities plan to implement measures such as rate cuts or increase in government capex in the next budget cycle. A lot of developments are expected. The first half was certainly affected by the heatwave, elections, and deferral of government expenditures. However, many of these challenges will subside. With a bumper monsoon, we can expect increased post-crop buying, and there is also a record number of marriages this year. All of these factors should contribute to a better second half.

What is the one myth about investing that you want to bust for retail investors and beginners alike?

Don't speculate; invest in companies. Bring patience. You can bring in money, but patience is just as important. In this market, if you're not being overly speculative, you won’t lose—you'll likely make 10-12%, maybe 15%. And if you bring some brilliance into it, you could see returns of 15-20%. This is a market that typically offers around 15%, and with a little extra effort, you can reach 18%. What more could you want? In the banks, you would make only 5%, and it would take 15 years to double your money. Here, you could do it in just four years.

Every experienced investor has made mistakes at some point. Could you share one investment mistake that had a lasting impact on your philosophy or approach to investing?

There have been many mistakes, and you learn from them. One of the key lessons is not backing a bad promoter. Investing in a company at a high price can hurt, but it can get corrected over time. However, backing a bad promoter is a permanent problem, so it's important to avoid knowingly supporting one.

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