Bazaar & Beyond: Sideways Markets, SIP Flows, Quality Investing and AI

Introduction

Vivek Ananth:

Hello everyone, and welcome to another episode of Bazaar & Beyond. Today, we have with us Anupam Tiwari of Groww AMC, with nearly two decades of experience in equity fund management. He brings a sharp perspective on quality, growth, valuation and investor behaviour.

In this episode, we will discuss how investors should think through sideways markets, strong SIP flows, FII selling, AI disruption and India’s major structural opportunities. We will also understand why, in long-term investing, the framework used to evaluate a theme can be more important than the theme itself. Thank you so much, Anupam, for joining us on Bazaar & Beyond. Sideways Markets, Growth Concerns and Earnings

Vivek Ananth:

I wanted to begin by asking about the sideways market that we have been seeing over the last two, three or four months. There was also considerable pessimism around growth. People were asking whether India’s growth would slow and what would happen to corporate India’s earnings. However, in the current earnings season, we are seeing a decent amount of growth. At the same time, the crude oil shock has left the market slightly jittery. How do you see this playing out? Where do you see the Indian economy and the markets going forward?

Anupam Tiwari:

Thank you, Vivek. Thanks for speaking with us. There are two things that drive markets and stock prices: numbers and stories. Both have to exist. The numbers need to come through, and there also needs to be a supporting story. When both are present, markets generally do very well. If the numbers are there but there is no story, stocks generally do not perform well. Similarly, if there is only a story and it is not supported by numbers, stocks do not perform well either. To understand where we are today, we need to go back and look at how this situation developed over the last two or three years. In very simple terms, there are broadly three earnings drivers for most companies in India.

The first is exports, including both goods and services. The second is government capital expenditure, which creates incremental growth.

The third is general economic activity within the country, including consumption and other domestic activities. Problems began emerging across all three segments around the third or fourth quarter of FY24. Why Exports Came Under Pressure

On the export side, if you remember, there was a major discussion in 2023 about the possibility of a recession in the United States. That began affecting our exports. When businesses expect a recession, the general tendency is to start running down inventories. At the same time, China became very aggressive in global export markets. After the slowdown it experienced following Covid, China invested heavily in industrial capacity to revive its economy.

It undertook more than $2 trillion of capital expenditure to create industrial capacity. Much of that capacity was then used to supply products aggressively into global markets. That created further pressure on Indian exports.

During the same period, Europe was also not performing particularly well. In the aftermath of the Russia-Ukraine war, the European economy came under considerable pressure because of energy prices and related factors. Suddenly, the overall international environment became quite challenging. Then, in calendar year 2025, tariffs became another major issue. As a result, many companies witnessed earnings downgrades. That was one part of the problem. Elections, Government Capex and Tight Liquidity India also had elections in 2024. During that period, there was a slowdown in government capital expenditure. It took around nine to twelve months for government capex to regain momentum. That caused earnings downgrades for another set of companies. If you remember, the RBI also kept liquidity very tight in 2024. Interest rates were not cut even when inflation had declined considerably.

In fact, the tightening of liquidity was probably more important than the level of interest rates itself. The combination of pressure on exports, slower government capex and tight domestic liquidity caused a large number of earnings downgrades. It also damaged market sentiment and created considerable negativity. AI Concerns and FII Selling After that came the broader AI narrative. India began to be viewed as an anti-AI trade. The argument was that if AI adoption accelerated, India could face earnings downgrades, declining profitability and pressure on jobs. At the same time, markets such as China, Korea and Taiwan began performing well. China began gaining momentum from around September or October 2024. It had become very inexpensive, and investors had not made money there for nearly 10 to 15 years. China had been a very difficult market for more than a decade. These factors led to selling in India and had a major impact on sentiment, particularly because of FII selling. FIIs have the option to invest across emerging markets, so they can shift allocations depending on relative opportunities. At that time, India’s weight in global emerging-market portfolios and indices had become very high, at almost 20%. After China, India had become the second-largest market by weight. India’s share of the combined emerging-market GDP was much lower, but its index weight had risen to around 20%. So, selling began. Investors were also overweight on India because, between roughly 2014–15 and 2023–24, India had performed significantly better than several other emerging markets, including Taiwan, Korea and China. All these adjustments began happening together. There were earnings downgrades, FII selling, China becoming more competitive and, later in 2025 and more prominently in 2026, concerns around AI. That created considerable pressure on the Indian market and also weakened the supporting narrative.

Why Earnings Are Now Improving If you look at what is happening now, earnings downgrades have started reducing from around the second quarter of FY26. We track the ratio of earnings upgrades to downgrades, and the number of downgrades has come down considerably. If you look at the numbers for the second, third and fourth quarters, as well as the first quarter, even after the war-related developments, the results have not been as poor as people expected. There was a widespread expectation that corporate numbers would be extremely weak. But they were not as bad as feared. Why are we now seeing improved numbers and results that are better than expectations? One reason is that interest rates were reduced in 2025, and the RBI injected some liquidity into the system. That eased conditions to some extent.

There were also GST reductions and income-tax relief from the government. These measures gradually helped rebuild confidence. The GST reduction, in particular, supported confidence. The pressure from tariffs also began easing around September or October. As a result, exports started recovering gradually. Buyers became more open to importing from India, and Indian exports began improving. Government capital expenditure also began picking up around the middle of 2025. Government expenditure returned in terms of ordering activity and related spending. There can be some quarterly cyclicality, but the trend is gradually returning to the right track. Government capex is recovering, exports are improving, and nobody in the United States is seriously talking about an imminent recession anymore. How Market Narratives Become Amplified There is something we sometimes describe as the vividness effect. Everybody has to talk about some topic, whether it is the media, commentators or people on social media. Exposure to information is extremely high today. Everyone is on social media, and algorithms repeatedly show you content similar to what you have already consumed. As a result, certain topics rise very quickly in terms of popularity and sentiment, and then decline just as rapidly.

We are now seeing something similar with AI. The narrative is already beginning to reverse, and people are talking about the anti-AI trade. From a numerical perspective, however, I believe we are on the right track.Why This Is Different from Earlier Crises

One thing we should remember is that many people are comparing the current situation with 2007–08 or 2013. But there is one major difference between those crises and the present situation: the balance sheet. During those earlier periods, corporate and banking balance sheets were highly leveraged. Banks went through an NPA crisis that lasted almost ten years. This affected PSU banks and some private-sector banks as well. This time, balance sheets across the board are extremely strong. They are exceptionally healthy. Sometimes, we even wonder whether such strong balance sheets can be sustained. But companies and lenders have become far more disciplined. Another positive development is that a large part of current growth is being funded through equity. From a system-level perspective, that is very healthy. When you are funding the initial stages of growth, risk capital is the best method.

If there is cyclicality, equity capital can absorb significantly more risk than debt capital. Debt capital cannot absorb excessive risk. That is why the current structure is positive, and it is also why growth appears more sustainable this time. In the previous cycle, a large part of India’s growth was funded through debt. It then took almost ten years to clean up the resulting problems and recover from the pain. When the global financial crisis unfolded, the risks embedded in that debt-funded system became visible. NPAs followed. Until around 2018–19, the system was largely occupied with cleaning itself up. There was the NBFC crisis, followed by the Yes Bank crisis and several related issues. This time, India is in a much better position. Balance sheets are extremely healthy, and that is why I am not excessively worried. Is India’s Corporate Capex Cycle Picking Up?

Vivek Ananth:

Do you think this investment cycle will turn, with corporates beginning to invest in new projects? I remember you mentioning that it peaked around 2022. As you explained, it began slowing down by 2023. Considering how well-positioned companies are for the future, do you think the cycle will pick up again?

Anupam Tiwari:

In my view, the cycle is already underway. We need to understand why capex as a percentage of GDP is not returning to its previous level. People repeatedly point out that capex as a percentage of GDP used to be higher and is now lower.In my opinion, we may never return to that earlier level. When we were undertaking the initial phase of capex and it appeared very high as a proportion of GDP, India’s GDP base was much smaller. Also, capex is generally undertaken for the next ten years. You are effectively bringing forward expenditure for future capacity.

That capacity is not being created only for the GDP of that particular year. Therefore, capex appears very high as a percentage of GDP at that stage.

Today, the GDP base is much larger. The second factor is that services now form a very large part of our GDP. The capex intensity of services has declined because of digital technology and changes in the broader ecosystem. Let me give you a simple example. Look at the ratio of bank branches to the amount of business conducted.

Twenty years ago, a bank had to open a branch to conduct a certain amount of business. Today, it can conduct much more business with fewer branches. The bank also does not necessarily undertake the capex for the branch itself. Someone else may construct the building, and the bank rents it. Therefore, the bank does not need to create as much real estate infrastructure.

Across service industries, capex intensity has declined over the last 10 to 15 years because of digitalisation and related developments. Take online shopping.Imagine how many malls and shops India would have needed if online e-commerce did not exist. People would still need somewhere physical to make their purchases, such as brick-and-mortar stores. A physical shop has limited capacity. It can conduct only a certain amount of business.

That requirement has reduced. We no longer need as many commercial establishments. There is also much more working from home, and technology intensity has increased. All of this has caused some reduction in the capex intensity required for incremental GDP growth.

That is one factor. I am not saying it is the only factor. There is a combination of several factors. Capex Has Also Become Cheaper The second development is that there has been some deflation in capex. If you look at the largest components of capital expenditure, energy is one of the biggest. A large amount of capex goes into energy and transportation, followed by general industrial capex. Energy itself has two major components: power, and oil and gas. Capex in oil and gas has already peaked because the world wants to shift towards renewables. Fifteen years ago, India was investing heavily in oil and gas because we needed to build several refineries and related infrastructure. That requirement is no longer as high because we already have sufficient capacity.

In fact, the existing capacity may be able to support around 50% more GDP from current levels. The second factor is that we have shifted considerably towards renewables. There has been substantial price deflation in renewable energy. For example, solar power may cost roughly ₹3 crore, ₹4 crore or ₹5 crore per megawatt.

Compare that with thermal power, where the cost may be around ₹20 crore per megawatt. Therefore, the cost of capex, particularly in energy and power generation, has declined considerably. This is specific to generation. A significant share of India’s primary capex in power is related to generation.

Transmission and distribution tend to progress more slowly. That is one reason. We have also seen significant adoption of rooftop solar and captive solar. Industries are shifting towards these options. As a result, some capex that would earlier have appeared as public or private utility capex is no longer reflected in the same way. That is the second reason. Companies Have Become More Efficient The third factor is that companies have generally become more efficient. Take the cement industry. Companies have worked extensively on reducing power consumption per unit and transportation cost per unit. Through efficiency improvements, they have continuously reduced the cost per unit. Therefore, the capacity that previously had to be created for power consumption or fuel requirements has also reduced. These are all reasons why capex as a percentage of GDP appears lower. But this does not mean India is not undertaking capex. Another factor is that from around 2011–12 until 2020, corporate balance sheets were in very poor condition. 

Everybody went through considerable pain. Companies have learnt from that experience. They now want to be extremely cautious with capex and avoid damaging their balance sheets. That is a positive development. It is better to grow slowly than to take excessive risk. China has also become highly competitive in industrial capex and related areas. That has played a role as well. If you consider all these factors together, I do not think the situation is as bad as people perceive it to be. However, we must understand that the earlier capex intensity relative to GDP is unlikely to return. It has declined significantly, and it is likely to remain below those earlier levels.

Are Domestic SIP Flows Driving the Market?

Vivek Ananth: I want to use something you mentioned about foreign selling and FIIs to move into my next question. SIP flows have continued to increase and are now around ₹30,000 crore per month, while FIIs are selling. The broad heuristic that the market has created is that FIIs are selling while Indians are buying. These domestic investors include ordinary retail investors, who are also among the primary investors in mutual funds. Are domestic investors now driving the direction of the market, or is that being overstated? Sometimes, people feel domestic investors may be underestimating global risks and risks within the market. The mutual fund industry, brokers and mutual fund distributors have all promoted SIPs extensively, and that effort has been successful. SIPs have also helped create wealth for investors over many years. 

Where do you think this trend is going?

Anupam Tiwari:

Let us understand this in detail. I do not agree with the argument that SIP promotion has created a misconception and that this misconception alone is causing people to invest. The market has experienced significant weakness and volatility over the last three or four years. We have seen the Russia-Ukraine war, post-election volatility and everything that has happened over the last year or year and a half. It is not as though investors have never experienced volatility. It would be incorrect to say that they still do not understand volatility and are investing only because they are being influenced by promotional activity. A large number of investors putting money into the market today are not new investors. A significant amount of money is coming from people who have been investing for ten years or more. They are now becoming more confident. If you look at the last 15 years, Indian investors have experienced substantial volatility. Starting from around 2010–11, there were extremely difficult periods. Around 2018–19, it sometimes felt as though everything in India might come to a halt. Then there was the NBFC crisis.

We have seen worse conditions. Many people do not understand that Indian investors have experienced far more severe situations over the last 15 years. Balance sheets themselves had deteriorated badly. At times, it felt as though everything might stop functioning. Therefore, I do not accept that argument.

Why SIP Investments Are Increasing

People are investing for two broad reasons. There are new investors, but most of those investors are not allocating very large amounts. Investment awareness has now spread to Tier 2 and Tier 3 towns. People have become more educated and aware. A large number of people have started investing ₹2,000 or ₹5,000. Some have even started with ₹100. When these contributions are aggregated across a very large number of investors, they become a substantial figure. At the same time, older investors who have been investing for around 15 years have seen their income levels rise. They have also had a reasonably good 15-year experience of investing in mutual funds. In India, equity allocation is still generally very low. As a percentage of household assets, it is low compared with many other countries. I think it may be below 5%. Even if you randomly speak to 10 or 15 reasonably well-off people, their largest allocations are generally still in real estate and gold.

Equity usually comes third. Even among urban or semi-urban people who are earning well, equity allocation may be only around 10% or 12%. That gap will gradually be filled at some point. It is good that people are investing slowly. It is not as though they are making extremely large lump-sum investments that could create serious problems during volatility. Is ₹30,000 Crore per Month Really Excessive?

Let us look at the numbers in the Indian context. Indian companies distribute approximately ₹4 lakh crore to ₹5 lakh crore in dividends. Last year, it was around ₹4.5 lakh crore. Suppose foreign investors own around 15% of that. Approximately ₹65,000 crore to ₹70,000 crore may therefore go outside India. The remaining dividend income stays within India. That leaves approximately ₹3.8 lakh crore to ₹3.9 lakh crore within the domestic system.

If investors are putting around ₹3.6 lakh crore into equity annually through SIPs, the incremental amount going into equity is not extraordinarily large. The dividend income itself is greater than that. Consider another number. The remaining ₹3.7 lakh crore or ₹3.8 lakh crore in dividends has to go to someone. It may go to promoters who own businesses, retail investors who hold old shares, or institutions. Suppose institutions receive around 20% to 25%. After removing approximately ₹1 lakh crore to ₹1.25 lakh crore, there may still be around ₹2 lakh crore to ₹2.5 lakh crore left for other domestic investors. That is one point. The second point is income.

I think the Income Tax Department had once published data suggesting that approximately ₹32 lakh crore to ₹33 lakh crore in salary income is distributed to people who file income-tax returns. They had added the numbers to estimate total salary income in India.

So, around ₹32 lakh crore to ₹33 lakh crore is being distributed as salary income every year. Now consider these figures together. There is dividend income in India.

There is salary income. People also earn business income and generate surpluses from their businesses. In that context, ₹30,000 crore per month is not an extraordinarily large number. It is not a number that deserves excessive discussion. The figure is also amplified in the media because, as you mentioned earlier, people constantly need talking points. I think the real concern for many people is that the SIP number is not declining. A lot of people have been expecting it to fall for a long period, but it has not fallen. That is why they are worried. Fundamentally, however, it is not such a large number that it must decline.

India is a roughly $4 trillion economy. Over the last five or six years, there has also been a significant wealth effect from gold and real estate. Consider this from an individual investor’s perspective.

Five or seven years ago, someone may have owned a house worth ₹50 lakh, ₹60 lakh or ₹70 lakh, or some land valued at that level. They may also have owned ₹15 lakh to ₹20 lakh in gold and ₹10 lakh to ₹15 lakh in equity. Now consider how the proportions of that portfolio have changed.

Real estate has appreciated. Gold has appreciated. But the person may not have invested significantly in equities.

They can now see that the proportion of equity in their portfolio has become very low. Naturally, they may want to correct that imbalance. People are gradually doing so. Therefore, I do not see the SIP number as problematic. I believe it will continue to rise as the wealth effect increases and as people generate larger surpluses. We should also understand that many people who began earning 15 years ago have now reached middle-management positions. Their investible surpluses are rising.

Young people are also much more aware and are beginning to invest earlier. When we analyse the average SIP size, we often find that in many places it is around ₹3,000 or ₹4,000. That is healthy. I do not see it as a structural problem.

In fact, I think the number is too small to be a serious concern. How Should Investors Interpret FII Selling? Coming to FIIs, every trade requires both a buyer and a seller. A market cannot function if there is only a buyer. It also cannot function if there is only a seller, because a seller needs someone to buy. Ten or 15 years ago, when FIIs were buying, it was not as though every purchase came only through primary issuances.

They were buying from someone in the secondary market. That seller is now presented as though they were a loser. But had that person continued holding, they may have earned at least 8% or 9% through the Nifty. From that perspective, there always has to be a seller and there always has to be a buyer.

Yes, because of the circumstances we discussed, India had become a relatively overweight position in global portfolios. India then entered a cyclical slowdown and experienced EPS downgrades. At the same time, competing markets began performing well.

There is another factor we need to understand. After the global financial crisis, investors reduced some exposure to developed markets and allocated more money to emerging markets. More recently, Europe also began performing better. There was discussion around increasing fiscal deficits and related measures, which created momentum in European markets. The United States performed well because of AI and related themes. But the broader US economy was also performing reasonably well. Regardless of the theme, it was contributing to growth. The AI theme itself involves companies of enormous size. We are discussing companies with market capitalisations of around $500 billion to $1 trillion or more. Many investors therefore had to shift allocations.

If their US allocation was too low and they wanted to increase it, they had to withdraw money from somewhere else because their portfolios had an allocation mismatch. That also contributed to some selling in India. We should not automatically interpret it as structural.

This happens in markets. Sometimes, investors undertake major restructuring within their portfolios. If investors have entered a market, they can also leave it. You cannot stop them. Continuing exactly from where the previous section stopped, here is the complete remaining transcript, covering market behaviour, quality investing, the PSS framework, incremental ROE, valuation, thematic investing, AI and Indian IT, the belief Anupam Tiwari had to unlearn, recommendations and closing remarks. Market Sentiment, Trading and Investor Behaviour

Vivek Ananth:

Sometimes, I also feel that there is a slightly defeatist element among people who talk a lot about markets. I do not mean this as a value judgement, but whenever the market goes down, people begin asking why it is happening. I remember looking at the FII numbers in 2024. They were net negative then, and they were also net negative in 2025. But in 2024, nobody seemed particularly concerned because the market still went to an all-time high in September. Then, as you mentioned, the China theme began around October and money started moving out. Nobody was talking about it then. Now, because SIP flows are rising while FII numbers are negative, people are trying to build a connection between the two. It looks very stark. But I understand what you are saying. It is not that simple or linear.

Anupam Tiwari:

Yes, I think people have become too emotionally attached to markets. That should not happen. One should be objective and rational. One positive development, and something I am quite happy about, is the current market environment. Markets should behave like this. They should be sanity-driven. The kind of crazy bull run that happened after Covid was very unhealthy, especially for fund managers like me. We do not want to trade every day. We want to do the work calmly and buy the right company at the right price. During that period, there was a lot of madness.

A lot of people became full-time traders. There is almost nothing like a consistently successful full-time trader. Globally, fewer than 1% of people succeed in trading. The post-Covid bull run created a new category of people who became obsessed with markets. Their full-time job effectively became the market. Some people left their jobs to trade. I heard stories of lawyers leaving their jobs and doing this. That is not sustainable. The market should give people a jolt so that they understand this. And this happens in every bull market.

I have seen it before. I entered the market in 1999, and a bull run began not long after that. It happened again in 2004, 2005 and 2006.

Social media was not as prevalent then, but I saw people trading more and more. There were physical broker offices. I remember that before the 2001 crash, broker offices would be crowded throughout the day.

You could see people becoming increasingly frenzied. That was happening again recently, except this time it was online and amplified through social media.

Everyone could see it. But it is unhealthy and should not happen. It is good that people have received a shock. The market is not there to give you 5% or 10% every month. You cannot continue taking leveraged trades indefinitely. Markets are uncertain. Risk is high. You have to enter with that understanding.

That is why you need capability, learning, practice and years of experience before you can consistently make money. From that perspective, what is happening now is healthy. In my opinion, the market should remain like this. It should be driven by sanity, where prices move according to numbers, not only sentiment. Markets cannot remain sentiment-driven forever. Sometimes, I also think we are too harsh on ourselves. We are very self-critical.

Perhaps that is an Indian tendency. We reflect deeply on ourselves, our lives and our surroundings, and sometimes the conclusion becomes overly negative. Blaming the system rather than ourselves is also a problem. I do not think our condition is as bad as people perceive it to be. Every country goes through these problems. In fact, one good thing is that India does not currently have any major structural problem. Earlier, one problem was that we did not have enough capital.

Now, we do. We are generating capital. Our dependence on foreign capital is declining significantly. A lot of new start-ups are now being funded by Indian risk capital. That is very positive. Some of these businesses will create wealth in the future, and we will be able to retain that wealth within the country. Has Easy Market Access Created Hasty Investors?

Vivek Ananth:

I want to switch tracks slightly. You spoke about digitalisation. I sometimes feel that easy access to securities and investment options may also lead to hasty decisions.

Suppose the market falls 2% today. A lot of people are not accustomed to large drawdowns in the market or in their portfolios. They may make impulsive decisions. Do you think solving for access has created another problem, where people need to learn not to press the sell button immediately? Perhaps they should pause, or even consider buying more.

Anupam Tiwari: To some extent, yes. But it is not as though this did not happen earlier. As I was saying, I have seen broker offices crowded with hundreds of people speculating. At that time, trading happened through physical terminals. During a bull market, the number of terminals would increase. A broker who had two terminals might suddenly install eight. This happened even earlier. Fear and greed are very deep human emotions.

They are extremely difficult to control, especially when access becomes easy. So, I agree with you, but only partially. Without apps and such easy access, the extent may have been somewhat lower. But people would still have traded physically. They would have opened accounts with brokers and placed trades over the telephone.

They would still have done it. Also, urbanisation in India has increased considerably over the last 15 years. A large number of people who are earning well are now urbanised. Even without apps, their access would have increased because brokers have expanded and opened offices in many more places. So, to some extent, you are right. But this cycle appears in every bull market.

The form of expression changes. People trade in a bull market and believe the returns are because of their skill, not luck. They become overconfident. They make some money, become even more confident, then lose money and eventually leave. This cycle repeats every time.

What Makes a Quality Business?

Vivek Ananth: I want to ask you about quality. Usually, when people think about quality stocks, they associate them with stable businesses or consumer names such as FMCG companies. But there are also cyclical businesses. Suppose an investor is trying to identify quality within cyclical sectors as well as within stable consumer businesses. Sometimes, earnings can remain weak for extended periods because of external factors.

How should an investor evaluate quality in such cases?

Most of our viewers are DIY investors, so they would value your perspective.

Anupam Tiwari: Certainly. The first question is why quality is important. Why should we invest so much time and effort in understanding whether a business is of high quality? Because quality drives compounding better than a low-quality stock. Markets are cyclical. Drawdowns happen. Negativity appears. High-quality companies and businesses generally experience lower drawdowns. Their recovery is faster. They also continue to receive capital at a competitive cost in almost any environment. Suppose the environment deteriorates and you have two banks. One has an excellent track record. The other has a poor NPA track record.

Even the good bank may face some impact if the entire system is under pressure. But in the worst environment, the stronger bank will still be able to access capital because it has demonstrated its capability. That is why quality matters across businesses. Disrupting compounding is extremely damaging.

Suppose you buy a stock and it doubles. But after that, it falls 30% or 40%. Your compounding can be permanently disrupted because you now have to recover from a much lower base. On the other hand, a stock may not rise dramatically, but if it also does not fall sharply, the compounding journey remains more stable. That is why quality matters. Now, how do we evaluate quality? Quality is not only about stability. There are two dimensions. One is the quality of the business. The other is the quality of the promoter and management. Both are important. The first thing to evaluate is the quality of the promoter and management. Integrity and governance are obviously important. The second part is capability. Capability drives growth. There is a major misconception among investors.

People get carried away by the idea that the size of the opportunity creates returns. That is not necessarily true. Beyond a point, the size of the opportunity is irrelevant. If the promoter and management are strong, they will keep creating opportunities for themselves over time.They will innovate.

They will introduce new products. They will expand into new areas. Consider India. There are many businesses where the size of the opportunity is enormous. Take footwear. India has around 150 crore people. That is clearly a large opportunity. But show me one footwear company that has created extraordinary wealth over a long period. Consider EPC businesses. It is not as though construction has not happened in India over the last 20 or 25 years. There has been enormous civil construction in roads, railways and infrastructure. But how many EPC companies have become 10x, 15x or 20x wealth creators? Very few. So, the size of the opportunity alone does not matter. The quality of the business and the management matters. Management Capability and Calibrated Risk-Taking The quality of management is extremely important. You need to assess whether the management has the ability to scale the business, create new opportunities and drive profitable growth. It should also have strong capital allocation capability. I describe this as calibrated risk-taking. You do not want excessive risk-taking because that can destroy the business. You also do not want too little risk-taking because then the company will not grow. If management becomes excessively conservative, growth will suffer.

You need an entrepreneur or management team that can take calibrated risks and scale the business at the same time. Scaling a business is a major challenge. You need to get many things right. You will also get some things wrong, and you must correct yourself while continuing to execute. That capability is essential. Management must also be able to attract good talent. Capability creates growth. Growth creates compounding. The story begins with capability. Without capability, you cannot grow. That is one side of quality: the promoter and management. The second is the quality of the business. The business itself has to be good. If the underlying business is poor, even excellent management can only do so much. There is a well-known Warren Buffett idea that when a management team with an excellent reputation takes over a business with a poor reputation, it is often the reputation of the business that remains intact. The PSS Framework We evaluate business quality through both qualitative and quantitative factors. On the qualitative side, we use what I call the PSS framework. I learnt this from Manish Chokhani. He created an excellent presentation, and I think everyone should go through it. I believe it was prepared around 2003 or 2004. It should be available online. We recommend it to every new analyst who joins us. The presentation is called Mind of an Analyst. It is a fantastic presentation. He is extremely intelligent and has deep knowledge.

Vivek Ananth: We will try to link it for our viewers.

Anupam Tiwari: Yes, I think it is available somewhere on the internet. It is an old presentation, but still highly relevant. It explains how to look at businesses as an investor and as an analyst. The PSS framework stands for: Predictability. Sustainability. Scalability. First, you need to understand whether the business is predictable. Predictable businesses generally receive higher valuation multiples. A business that is less predictable usually receives a lower multiple. Second, the business should be sustainable. It should be able to sustain a base level of earnings, profitability, return on equity and other operating metrics. Third, it should be scalable. You should be able to scale the business over time. You need to think about what the business may look like five or ten years later. The second part is quantitative. There, you need to focus on three factors: Operating cash flow. Return on equity. Incremental return on equity over time.

If you understand these metrics correctly, you can assess the quality of the business. So, our framework begins with the quality of management and promoters, followed by the quality of the business. Why Incremental ROE Matters More Than Profit Growth Alone

Vivek Ananth: You mentioned incremental ROE. I want to explore that further. Why is incremental ROE more important to you than, say, profit growth while evaluating a company? What does it reveal about the earnings profile?

Anupam Tiwari: Profit growth is important. It is not that companies do not need profit growth. But companies that command higher valuation multiples and continuously create value are generally those that grow with improving incremental ROEs. What is business value? In simple terms, it is the return on equity minus the cost of equity. If you look at it mathematically, and if you extend the life of a business, then unless the business is improving its ROE, its cost of equity will not decline. That is the basic equation. Therefore, incremental ROE should improve. First, it indicates that the cost of equity is declining. As an existing shareholder, I benefit from that. Suppose the company needs to raise new capital in the future.

If its cost of equity has declined, the existing shareholder benefits because the company can raise capital more efficiently. Second, if incremental ROE is higher, every incremental unit of growth requires less capital. The capital requirement declines.

Therefore, the gap between ROE and the cost of equity widens. Business value rises. The valuation multiple can also expand That is why incremental ROE is important. Suppose a company is growing at 20%, but its ROE remains constant at 20%. Its valuation multiple may not expand significantly. There are several ways in which incremental ROE can improve. The company can increase value addition. When we analyse the ROE tree, there are broadly three drivers: Asset turnover. Margins. Leverage. For now, remove leverage from the equation. How can asset turnover improve? The business can increase value addition. How can margins improve? Through innovation and cost control. Every business has to evolve in this manner. Either asset turnover must increase or margins must rise. If margins cannot improve, asset turnover should improve through some other operational advantage. That is how we think about it.

If you analyse markets anywhere in the world, including India, companies that consistently deliver improving incremental ROEs generally receive higher valuation multiples. Those multiples also tend to remain elevated. That is extremely important. Profit growth alone is not enough. Profit growth can also happen in highly commoditised businesses. Take the steel industry. If you remove the cyclicality, incremental ROE in a steel business cannot increase beyond a point because it is capital-intensive. Suppose a company has five million tonnes of capacity. It produces and sells the entire five million tonnes. That gives it a certain asset turnover.

If prices rise, the cost of new capex also rises. Competition can enter because the product has limited differentiation. There is no meaningful moat. The company can work only on cost. Beyond a point, cost cannot be reduced further. Incremental ROE will not improve unless the company changes its product profile. It may need to move into value-added products, further processing or downstream activities, where it can generate additional revenue with a lower incremental cost. That can improve incremental ROE. Without that change, the valuation multiple may never expand meaningfully. Fifteen years ago, steel companies traded at roughly eight, nine or ten times EBITDA, depending on growth. They often trade at similar multiples even today.

That is why it is important to think in terms of incremental ROE It helps distinguish a strong value-added business from a commoditised business. Can Capital-Intensive Businesses Generate High Incremental ROE?

Vivek Ananth: Would it be correct to say that a capital-intensive business without much of a moat does not lend itself easily to incremental ROE generation? 

Anupam Tiwari: Not necessarily. Sometimes, it can still happen. Take certain technology product companies. Their existing ROEs may be low because of the initial investment required. But once scale arrives, the additional growth may require very little incremental capital. Because of the intellectual capability and know-how they have built within their ecosystem, incremental ROE can become very high. So, you cannot always say that a capital-intensive business will necessarily have low incremental ROE over the long term. The theory of incremental ROE generally plays out over five to ten years, not necessarily in the short or medium term. There are many businesses that require substantial initial capital. They may be highly capital-intensive initially.

But over the longer term, the economics can change. Take telecom. Between roughly 2000 and 2015 or 2016, or perhaps even until 2020, incremental ROE in telecom was weak. Then, incremental ROE began rising sharply. Incremental EBITDA margins improved. That was when telecom stocks began to rerate. There can be multiple reasons for that, but the nature of the business changed in that direction.

How Should Investors Think About Valuation?

Vivek Ananth: A lot of investor education, including this podcast, talks about buying at a reasonable price, even in an expensive market. People are always searching for the best value relative to the future expectations of the underlying investment. But how does one find a reasonable price? I am thinking of December 2025, when the market returned to an all-time high after almost 15 months. In that environment, large caps may not appear cheap because many businesses are priced almost to perfection. You mentioned operating cash flow as one essential element. But there are also many new-age companies that do not yet have similar business models or the same operating cash flow-generating ability. How should one determine a reasonable price?

Anupam Tiwari: You are right. Valuation is the most difficult task in investing. Most people do not understand it properly, and that is where they lose money. Understanding what a company does has become relatively easy in the age of Google and AI. Companies themselves prepare very polished presentations. You can often understand the business by reading the presentation and listening to a couple of earnings calls. The real challenge lies in valuing the company. Valuation has two parts. The first is absolute valuation. If you conduct a theoretical or academic valuation of a company, the principal method is discounted cash flow.

That has not changed for decades. DCF remains the core method for absolute valuation. Everyone should learn it. A lot of people do not know how to do it. Today, an LLM can generate a DCF model. But that can still become garbage in, garbage out. The assumptions you put into the model are extremely important. Let me share a story.

There was a prominent consumer company in India. When I became a fund manager in 2011, I was discussing with an analyst how the company should be valued. Generally, we conduct at least one DCF for every company. You need to know where the ground is before judging how far above it the market is trading. The analyst prepared the DCF. He projected five years, then another five years, followed by a terminal value. He assumed 5% terminal growth. I said India is a growing economy with a very large population. We are likely to have a growth runway for 30 or 40 years. So why assume only 5%? And that was not revenue growth. It was cash flow growth. Margins can also change. I also acknowledged that growth could be lower.

But assuming only 5% turned out to be wrong on the downside. The company performed significantly better. It moved into premiumisation, and margins almost doubled. The entire cash flow assumption changed. That is the difficulty with DCF. An LLM cannot determine the right assumptions for you. You need substantial experience and understanding to estimate how a business may look five or ten years later. Only then can you make good assumptions. Those assumptions also have to be revised continuously. Our first step is absolute valuation. We use DCF, build multiple scenarios and examine the outcomes. The second step is to answer another question:

Five years from now, how will the market value this business?

What multiple could it receive? Suppose I plan to own the stock for the next five years. What exit multiple might I receive? We ask ourselves this question and spend considerable time answering it. If we are not comfortable with the potential upside based on that exit multiple, we generally do not buy the stock. Even if it is a very high-quality business, we may leave it alone. We wait for it to reach a price where, at that expected exit multiple, there is still a reasonable amount of upside. That is the absolute valuation side. The second dimension is contextual valuation. The market will not value a stock at its absolute fair value all the time. Prices move above and below it based on the sentiment cycle. You therefore need to calibrate your absolute valuation depending on how the shorter-term cycle is behaving. A stock moves through three kinds of cycles. The short-term cycle includes sentiment and inventory cycles. The medium-term cycle includes capex and capacity cycles. The long-term cycle is driven by capability. You need to understand where the business is within these cycles, where it is heading and how much calibration is required in the absolute valuation to determine the appropriate multiple. It is a complex exercise. Even today, after so much experience and despite having a team, we make mistakes. Most of our mistakes are in valuation rather than in understanding the company. It is also extremely difficult to train young analysts in this area. People are often obsessed with perfectly correlating growth and valuation multiples. They say, for example: If growth is 25% and ROE is 20%, the stock should receive a multiple of 30, 35 or 40 times. It does not work like that. Growth is not the only driver of valuation multiples. Several other factors also matter. That is why I say the stock market is a multifactor model. You have to understand all those factors. We have seen many stocks derate materially even while growth continues.

One way to think about valuation is to estimate the exit multiple five years later, place it in context and then make the investment decision.  It is a difficult task. Investors should devote considerable time and effort to it.

How Should Investors Evaluate Popular Themes?

Vivek Ananth: My last few questions are about themes. Some themes have dominated in the past and continue today, while others have become highly relevant this year. In India, some of the themes I mentioned include financialisation, premium consumption, particularly FMCG, manufacturing, Make in India and digitalisation. Both of us work in financial services brands that are contributing to some of these developments. Are these durable themes? You have seen many themes through different phases of your career. What would make you question whether a theme has run its course? Take areas such as defence. Private participation has been encouraged. The same is happening in space and drones. A large number of new themes keep appearing.

Then an NFO is launched or someone creates a stock portfolio around the theme. How should an investor evaluate whether the theme still has room to run or whether more evidence is needed to show that it can sustain?

Anupam Tiwari: I am generally against thematic investing. People should not do it, particularly retail investors. By the time a theme becomes popular, is widely discussed in newspapers and media, and finally reaches the retail investor, a large part of the opportunity has usually already played out. Only the final portion may remain. Every theme can work.

But even when a theme works, it does not mean that investors will make money in every stock within that theme. Take the paint industry in India. People have been painting their homes for 25 years. But did investors make similar money in every paint stock? No. The same applies to two-wheelers and cars.

People are buying vehicles. But have investors earned similar returns from every stock in those industries? No. Thematic investing generally does not work in the way people imagine. As I mentioned earlier, consider EPC companies. India has undertaken enormous infrastructure development, but investors have not necessarily made money in EPC companies. Making money in a stock is very different from merely identifying a theme that is doing well. India has low per-capita income and a large economy. Potentially, almost every theme has some attraction.

There is a shortage or problem in almost every area. Solving those problems can create economic value. Defence will grow. Technology will grow. Consumption will grow. But patterns change. The winners may be very different from the companies that appear dominant today. We are seeing disruption everywhere. Technology has demonstrated this clearly. Take digitalisation and financialisation. Incumbent financial services companies have faced major challenges. So, determining who will benefit from a theme and where money will actually be made is a different exercise. Broadly, we are positive on many of the areas you mentioned. But I prefer to call them areas rather than themes. Premiumisation is a good area to examine because per-capita income is rising and consumers are shifting towards premium products. But the question should not be: Should I invest in the premium consumption theme? The better question is: Does this company have a premium customer base, and does that give it a greater ability to sustain pricing power and margins than competitors? That is how we think about it. We will not say that every company connected with premium consumption should be bought. But businesses with strong exposure to premium consumption may be better positioned. Financialisation is also a positive structural development. Manufacturing, particularly export-driven manufacturing in India, can perform well. These are the broad areas where we remain positive. Is Indian IT Becoming Irrelevant?

Vivek Ananth:

You mentioned technology. Over the last six months, there has been a lot of concern about whether Indian IT is becoming irrelevant. Before we began recording, we also discussed how similar concerns were expressed almost 15 years ago. Some people are presenting a doomsday scenario. They believe that if Indian IT services decline, there could be significant wealth destruction because millions of people are employed by the sector. Roughly three to four million people work directly in IT services. The AI trade has also been cited as one reason for weakness in the Indian market. Now, people are searching for an anti-AI trade. Some are saying FII money returned in July because AI-related markets had become overheated. Could you explain why this pattern occurs? When cloud technology emerged, similar claims were made. Yet Indian IT services companies adapted and compounded several times over. I keep asking guests about this because the issue repeatedly comes up.

Anupam Tiwari: First, let us understand what AI actually is from our perspective.We are also using AI. I have two engineers in my team working extensively on it. We are developing several tools to improve productivity within our research process. AI is a good technology. But it is not as universally transformative as AI companies sometimes market it to be, where you simply press a button and everything is completed automatically. That is not the case. A great deal of work is still required. Using AI for complex tasks is difficult. If you want it to perform a simple task, such as drafting an email or writing a letter, that is relatively easy. LLMs have become highly efficient at such tasks.

But if you want to use AI for complex corporate-level work, it requires significant implementation and functioning around it. There is substantial management required around security, complexity and integration. No organisation works in isolation. Take a bank. Its data is interconnected, and there are major security issues involved. So, AI is not as all-powerful as some people claim. It is not going to perform every task on its own. In coding, for example, productivity gains may be between 20% and 40%. Some of those gains will eventually be passed on by IT companies. But pure coding is not the entire job. Companies have existing systems. You need to connect new tools with those systems. You need to understand where everything sits, how security will work and how the other systems will interact. Indian IT companies will continue to be required.

AI itself still has to be implemented, executed and monitored by people. You will need more knowledge, not less, to use it properly. You need to be smarter than the AI in order to determine whether its output is correct or incorrect. The other question is how much revenue loss or productivity-gain passback will have to be shared with clients. In technical language, we call this productivity-gain passback. I think we will gain more clarity over the next four to six quarters, perhaps up to eight quarters. Many client contracts run for five years and are renewed periodically. The passback will happen during those renewal cycles. Over the next four to eight quarters, we should begin to understand the base level of impact. There is clearly a productivity gain. IT companies themselves are also benefiting from that gain. It is not as though they receive no benefit. Why AI May Benefit India More Than It Hurts The third point is that I believe India may benefit more from AI than it loses.

Our capabilities will improve. Suppose an engineer is sitting in Indore. Earlier, that engineer may not have had access to certain knowledge or exposure. There were many things they could not easily learn. Now, with AI, they can learn far more. For both small and large Indian companies, product development cycles and efficiency can improve considerably. In my opinion, smaller companies may benefit from AI more than larger companies. Smaller businesses often face a capability constraint.

The improvement in capability may therefore be much greater for them than for larger companies. Speed to market will increase. Product development will accelerate. The gap we used to talk about, where India was five, ten or fifteen years behind Europe or the United States in quality or technology, may narrow. That will improve efficiency across the economy. Capability drives growth. Capability creates efficiency. Capability creates growth. Even in Western countries, I think smaller companies may gain more from AI than larger ones. Larger companies will experience productivity gains, but competition will also increase. Take the Indian IT industry. Smaller IT companies are still growing faster than many large IT companies. That is the current trend. That is also why they sometimes receive higher valuations.

They are now competing more effectively with larger companies. They are becoming more capable. The same client is giving them business that it might not have given earlier. Large IT companies therefore face two challenges. The first is AI. The second is slower growth in the traditional IT services industry. Spending on general IT services may be slowing while spending on AI services rises. At the same time, large companies are facing more competition from smaller firms. If AI is integrated into the delivery model, the gap between a $10 billion company and a $1 billion company can shrink.

Vivek Ananth: I had never thought about it that way. That is very interesting.

Anupam Tiwari: Consider a smaller bank and a large bank.

If the smaller bank can integrate AI into credit analysis and credit underwriting, and improve its turnaround time, customer satisfaction can rise over time.

Today, to match a large bank, the smaller bank would need to spend significantly more on resources, people, talent and systems.

But if it can automate these processes at a lower cost and improve turnaround time, it can compete with the larger bank much faster.

Vivek Ananth:

Similar to what fintechs did in lending?

Anupam Tiwari:

Correct.The difference between fintechs and incumbents was largely speed and the ability to absorb and deliver technology. That created the gap. The same thing can happen with AI. Suppose a complex piston has to be machined and manufactured for a European company. An Indian supplier may previously have taken a great deal of time because, if it was a smaller company, it had access to only a limited number of highly skilled engineers. It may have needed to consult someone, learn from specialists or hire a consultant. Now, if the supplier can build an AI system that helps design and machine the component faster, the client will be very satisfied. For India, AI has arrived at the right time.We are taking the first few steps towards expanding our manufacturing capability. Over a ten-year horizon, I think AI could be significantly beneficial for India. An Investing Belief Anupam Tiwari Had to Unlearn

Vivek Ananth:  What is one investing belief that the markets taught you to unlearn? Something you once held very closely, but later realised may no longer be applicable in the same way.

Anupam Tiwari: In the initial part of my career, I focused too much on one or two factors. Many of us have this bias because we begin by reading Warren Buffett when we are students of investing. We learn value and valuation in what I would describe as a somewhat distorted way. We focus less on the longevity and context of valuation. That is what I had to unlearn. Earlier, I would often look at a stock trading at 20 or 25 times earnings and say that it was too expensive and should be avoided. I have learnt that valuation is not always the only factor. With the right contextual framework, it becomes one element within a multifactor model. The belief I had to unlearn was the single-factor approach. I now understand investing as a multifactor model. Recommended Books and Investing Resources

Vivek Ananth:

My last question is about recommendations for our viewers. Is there a book, podcast, movie or television show that shaped how you think, or something you found particularly interesting and believe people should explore?

Anupam Tiwari:

One recommendation I already mentioned is Manish Chokhani’s presentation, Mind of an Analyst. It was created around 2004 and is still relevant. It is an excellent presentation. I recommend that everyone go through it. I think he has made other presentations as well. He is a very deep and profound learner.

Vivek Ananth: We have also done an episode with him. He is very profound and has remarkable clarity of thought.

Anupam Tiwari: Yes, that clarity is very important. There are also two books that I think everyone should read when beginning their investing journey. One is Pat Dorsey’s The Five Rules for Successful Stock Investing. It is a very good book. It provides a broad framework for how to think about stocks, industries and valuation. The second is Seeking Wisdom by Peter Bevelin. That is also an excellent and deeply insightful book. It explains how one should think about a wide range of issues. More generally, if people want to read something connected with stock markets, they should read Warren Buffett’s letters to shareholders. A lot of people read books written about Warren Buffett. I have generally found many of those books quite poor. His letters to shareholders are far more valuable. They are among the best things to read.

Vivek Ananth: That is excellent. Thank you so much, Anupam, for taking out the time. It was a genuinely invigorating conversation. I hope we can do this again sometime in the future. Thank you once again for giving us your time.

Closing Remarks

Vivek Ananth:That brings us to the end of this episode of Bazaar & Beyond. After this conversation with Anupam Tiwari, one thing stands out. Good investing is not only about finding the next big theme.It is about questioning that theme through the right framework. Whether markets are sideways or volatile, clarity, discipline and valuation awareness matter most.If you enjoyed this episode, please subscribe to our YouTube channel. See you in the next episode. Until then, stay safe and invest wisely.

Disclaimer: Investments in securities markets are subject to market risks. Please read all related documents carefully before investing.