Large-caps offer value, current valuations attractive, says Prashant Jain

Celebrated investor Prashant Jain, Director of 3P Investment Managers, is bullish on India growth story and also sees ample growth opportunity in the market, saying as the economy and savings grow, more money will find its way into equities.

The fund-manager-turned-entrepreneur, well known for his contrarian bets, says he is willing to pay a higher price-earnings multiple if it aligns with their growth projections. In an exclusive interview to Moneycontrol, Jain says he is bullish on banking stocks and also talks about how his other portfolio bets. Edited excerpt:

You’ve been raising funds. What is the sentiment among big-ticket investors?

Very positive. The medium to long-term growth outlook for India’s economy is extremely strong.

The acceptability of equities has steadily increased, especially post-COVID, the narrative has changed. Most people now agree that India’s outlook for the next decade is extremely positive. Additionally, the change in taxation on fixed income, effective April, has been helping the flow of funds toward equities.

Is this money sticky?

I don’t know but I believe there is ample room for growth in this market. India is a roughly a 4 trillion-dollar economy with 10 percent financial savings, amounting to $400 billion per year. It is a significant amount of money. It’s apparent that a substantial portion of this is finding its way into the markets, including various formats like EPFO, insurance, mutual funds, AIFs, PMS, and direct equities. As the economy grows and savings increase, the allocation to equities should continue to improve over time.

Your corpus is now Rs 6,000 crore. Tell us about your portfolio construct.

Initially, when we started, we had a mix of small and mid-cap stocks but now the majority of our portfolio is in large-cap stocks. Small and mid-cap stocks have performed exceptionally well in recent times, making it increasingly challenging to find reasonably valued stocks with realistic growth expectations. We are now directing almost all our investments toward the large-caps.

I see reasonable valuations in the banking sector, which has underperformed for an extended period. The current environment is favourable for banks due to strong corporate and bank balance sheets. I am also positive on the power sector, which was a contrarian call a few years ago but is gaining consensus support now.

Are the markets fairly valued or overvalued?

Large-cap stocks, I don’t see them as overvalued. Small and mid-cap stock valuations appear expensive but it is important not to judge the entire market based on small and mid-cap stocks, as they represent only a smaller portion of the the market’s total value.

Certain sectors within the Nifty, like banks, IT, and consumer staples, have experienced stagnation or underperformance in recent years. The Nifty’s CAGR over the last two years has been just 4 percent, leading to a de-rating of valuations. Based on FY26 earnings, the market is trading at 16x. I find current valuations reasonably attractive.

Why do you look at a two-year forward?

I focus on a two-year timeframe because, typically, markets trade based on forward earnings for one year. So, everyone looks at earnings one-year ahead. This is why I evaluate based on a two-year perspective.

But then, you are also paying for one year extra if you are incorporating that in your valuation…

I’m willing to pay a higher multiple if the growth justifies it. However, my approach to valuation is not solely based on low P/E ratios. I’m careful not to overpay for growth or for a good quality business. We maintain a sharp focus on realistic growth expectations and we are willing to pay a higher P/E if it aligns with our growth projections.

Know about Prashant Jain’s top stock picks

HDFC Bank is your top pick. Why?

HDFC Bank remains a strong franchise with robust growth prospects, which now offers reasonable valuations. The recent de-rating of the stock doesn’t change the fundamentals of the bank, the franchise, or the overall economic outlook. Moreover, it is an index heavyweight, which is crucial for active managers aiming to outperform the index. Betting on an index heavyweight with a strong franchise, growth prospects and reasonable valuations makes sense for us.

How do you view the impact of the management change? What do you consider to be the sustainable growth rate for HDFC Bank?

Management changes are a natural part of any business. While the recent management change and merger may have had short-term impacts on results, the markets have now absorbed these changes. In fact, there are long-term benefits to the merger such as the ability to compete in the large mortgage market and potential synergies between the two institutions. The bank continues to perform well and there’s no reason for concern.

As for the sustainable growth rate, while it may not be as rapid as in the past due to keener competition, I still find the current valuations reasonable, accounting for slightly slower growth.

What is your view on Kotak Bank, considering it faces similar concerns and has performed like HDFC Bank?

Kotak Bank is exceptionally well-managed and holds a high level of credibility. However, it is slightly more expensive compared to other banks with similar qualities. While we don’t currently hold it, it is a strong institution that should continue to grow and gain market share.

Read more from Prashant Jain

Disclosure: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.