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Gaurav Dua, 48, Head-capital market strategy, Sharekhan by BNP Paribas, has mastered the art of picking winners from a list of generic names. Dua has spotted several multibaggers like Relaxo Footwear, Divi’s Labs, Laurus Labs, PI Industries, Sudarshan Chemicals, Atul Limited, Intellect Designs, Persistent Systems and Affle India, among others. In an interview with Money9, he shared his formula to identify big gainers on Dalal Street.

Edited excerpts:

Q: Can you elucidate your stock picking strategy?

Dua: We use ‘3R’ proprietary framework for shortlisting a stock. ‘3R’ stands for right sector (macro environment should be favourable), right company (quality of promoters, business model and balance sheet) and right valuation (both on an absolute and relative basis). So essentially, we primarily use a top-down approach to build an investment portfolio.

However, we do explore and invest in compelling bottom-up investment opportunities and have the allocation for the same in an investment portfolio. In the case of bottom-up picks, we use the 15% hurdle rate rule, where the operating margins and return on equity should be higher than 15% mark. Also, the price-earnings ratio should be below 15 times on its one-year forward earnings.

Q: How do you decide whether to hold or sell the stock?

Dua: As an investor one needs to be patient and optimistic. A company with a structural growth outlook, strong cash flow and quality management would continue to offer superior returns to investors. But there is a period of sideways movement or underperformance which one needs to tide through by focussing on the long term opportunity in the stock.

Q: What would be your advice to new investors?

Dua: In trading or investing it is important to keep a disciplined approach. This essentially requires careful selection of stock, active tracking and timely action (even if it means booking a loss any a particular stock if required). More importantly, do not try to time the markets or focus on the index movement. Keep it simple and take professional advice.

Q: What enthused you to become a stock market expert?

Dua: I have been interested in equity markets since an early age. Started off as an investor in IPOs during my student life and built on it over the years. I enjoy analysing different businesses, interacting with entrepreneurs and investors.

Q: What lessons have you learnt in your journey?

Dua: There is so much to learn in the equity markets on a continuous basis. Successful investors are those who are willing to acknowledge their mistakes, take corrective action and make conscious efforts to avoid repeating the same mistake. Typically, like any new investor, I did also make the mistake of not maintaining a disciplined approach in terms of portfolio diversification, getting swayed by herd mentality and chasing short term share price movements. However, you learn to control the basic emotions of greed and fear and depend more on facts, research and wealth creation through long term investing in a disciplined manner.

Q: Why are retail investors not cagey despite Covid-led uncertainty still lingering?

Dua: Retail investors have shown lot of maturity this time around by investing through the volatile phase rather than sell and exit the markets in a panic. Apart from the increasing level of awareness and understanding of the benefits of investing through systematic investment plan (SIP), the retail interest inequities have also been boosted by the cumulative effect of easy-to-use trading platforms, declining transaction cost, sub-optimal returns in other asset classes and time on hand due to mobility restrictions in pandemic times.

Q: Where do you see the market going from here? Which sectors are looking good from an investment perspective?

Dua: We are positive about equity markets. The strong revival in corporate earnings growth, economic recovery in India and globally along with accommodative monetary and fiscal policy makes a strong case for reasonably good returns over the next 18 to 24 months. In terms of portfolio strategy, it is advisable to have a balanced approach at this point in time. This means an investor should diversify portfolio between largecap and midcap, growth and value stocks and defensive and cyclicals.

In terms of sectors, we are advising overweight on banks, autos, industrial and other economic revival driven sectors. On the other hand, one can reduce exposure to FMCG and energy sectors.

Our conviction ‘Buy’ recommendations are ICICI Bank, Cummins India, SBI, Ultratech, Tata Motors, Godrej Consumer, Infosys in the largecap space. On the other hand, we like Gland Pharma, Polycab, Dalmia Bharat Cement, Sumitomo Chemicals, Max Financial Services, Laurus Labs and SAIL in the midcap and smallcap segment.

Q: How do you see small and midcap stocks after the smart rally since March 2020 lows?

Dua: There are signs of speculative froth in certain stocks in the midcap and smallcap segments. Having said this, there are still some very attractive investment opportunities in the broader market but investors need to be very selective from here.

Q: Do you follow any other investors and which genre of books do you like to read?

Dua: There is so much to learn from the experience of successful, wise and savvy investors. However, one needs to chalk out your own style of investing and investment plan. I am an avid reader but two books that have influenced me a lot are: One Up On Wall Street by Peter Lynch and You Can Be A Stock Market Genius by Joel Greenblatt.
Another book that turned out to be thought-provoking for me is ‘An Economist Walks into a Brothel’ by Allison Schrager which introduces readers to five principles of dealing with risk not only in the investment world but also in normal everyday life.