Where compounding will create wealth in the next decade: N ArunaGiri, TrustLine Holdings decodes

The domestic equity market has underperformed for investors over the past 12 months, with the benchmark BSE Sensex delivering a modest return of 0.87% since October 9, 2024. In contrast, the broader BSE Midcap and BSE Smallcap indices have declined 5% each due to stretched valuations and uncertain global cues. Investors seeking clarity on where to deploy fresh money this festive season should not chase momentum, but rather remain patient, selective, and value-conscious, according to N. ArunaGiri, Founder and CEO of TrustLine Holdings.

In an interaction with Business Today, the market watcher, who switched from a technology career to set up TrustLine Holdings nearly two decades ago, says he has built a boutique investment firm rooted in Warren Buffett’s philosophy of value investing. TrustLine’s only equity PMS strategy, the Intrinsic Deep Value Fund, manages around Rs 1,200 crore and has delivered an impressive 18% CAGR since 2007, comfortably outperforming the smallcap index over the long term.

Sharing his views on the market, ArunaGiri said, “Valuations are expensive and earnings growth has slowed at the aggregate level. We may see a time correction phase where earnings catch up with prices. This could take two to three quarters.”

He believes the next phase of the market will be stock-specific and bottom-up, with selective opportunities in small and midcap stocks. “If you are sitting on the right stocks with earnings triggers, you will make decent returns. But broad-based rallies are unlikely. This environment suits patient, long-term value investors,” he added.

The founder of Chennai-based wealth management firm also said that they follow a bottom-up approach and have spotted value in a few themes. “One such area is shipping, shipbuilding and ship repair, where the government’s focus is shifting as traditional sectors like roads and railways reach their investment limits,” said ArunaGiri.

He is also positive on renewables, particularly wind and solar energy, and related businesses such as battery management and energy storage. “While the top names in renewables look expensive, there are undervalued companies downstream that can benefit from the sectoral push,” he said.

Among specific stocks, ArunaGiri likes Sanghvi Movers and Shivalik Bimetal Controls. He also added that these companies are small but enjoy high-quality businesses with solid fundamentals and reasonable valuations.

On the other hand, he stood cautious on mainstream IT services, citing challenges from AI-driven productivity gains and competition from global capability centres (GCCs). “The environment is not favourable for large IT firms right now,” he said.

ArunaGiri avoids PSU and defence stocks, saying that the unpredictability of earnings and high working capital cycles make them unsuitable for value-focused portfolios.

For long-term investors, ArunaGiri’s advice is simple. “Stay invested in high-quality small and midcap stocks with durable moats and valuation comfort. TrustLine Holdings typically invests in companies with a market cap below Rs 5,000 crore, strong free cash flows, high return on equity, and available at a 20-30% discount to intrinsic value,” he said.

“The essence of value investing is not chasing returns but avoiding risks,” he said, adding markets will test your patience, but compounding works only when you stay invested.

For those building portfolios amid the ongoing festive season, his message is clear. “Avoid chasing momentum. Focus on quality small and midcap stocks in emerging sectors like renewables, ancillaries and select manufacturing plays. That is where compounding will create wealth in the coming decade.”