Growth Is Not Enough: What Makes a Business Truly Sustainable?

The first question that every investor asks is ‘how fast can a business grow?’ Prateek Agarwal, Managing Director and CEO of Motilal Oswal Asset Management Company (MOAMC), believes there is a second and equally important question: how good is the business behind that growth? That distinction sits at the heart of MOAMC’s new offering, the Motilal Oswal Quality Fund, whose New Fund Offer (NFO) runs from August 28 to September 11.

Over time, MOAMC has built its reputation on high-conviction and research-driven investing. Agarwal explained that the firm’s core belief is simple. Markets move on earnings growth and the ability to spot sectors where growth can be sustained for longer periods creates the potential for outperformance, or alpha.

But growth alone cannot be the whole story. “Quality alone is not sufficient,” Agarwal said, adding that a business must also be able to fund its own expansion.

This is why MOAMC runs concentrated portfolios. Across its funds, holdings are typically restricted to 20-35 stocks. The reasoning, Agarwal said, is about staying relevant to the investor rather than just resembling the broader market. If a client holds ten different funds that are all loosely diversified, they end up unintentionally owning the index and paying for stock-picking skill but effectively getting market-average returns.

Not all growth is equal

A recurring theme in Agarwal’s approach is the difference between healthy and unsustainable expansion. “Growth can be of two types. One is sustainable, the other is cancerous. Now cancerous growth kills,” he said.

His benchmark is Return on Capital Employed (ROCE). A company earning 8-10% ROCE but attempting to grow at 30-40% annually is often financing that growth externally. This is a strategy that can unravel when capital markets tighten. Businesses with 20-35% ROCE by contrast, can fund similar growth internally, making their expansion far more durable. He pointed to construction companies around 2008 as an example of growth that outran the balance sheet’s ability to support it.

Beyond ROCE, Agarwal looks at market share trends, cash-flow trajectories even in loss-making young companies, and the size of the addressable market. A firm gaining share in a growing industry, he argues, is worth more than one simply riding an expanding market while quietly ceding ground to rivals.

The QGLP compass

MOAMC’s investment process is built around a framework the firm calls QGLP (Quality, Growth, Longevity and Price). This philosophy, Agarwal says, predates his own tenure at the firm, having been articulated by founder Raamdeo Agrawal roughly two decades ago.

According to him, the sequence is important. The team first looks for longevity in the form of spaces capable of growing strongly for many years, not just a few quarters. “Longevity of growth is a great start point to have, rather than one quarter, half a year, or one to two years of growth,” he said.

Only after establishing that a sector has a long runway does the team assess the quantum of growth, the underlying quality of the business (measured through ROIC and ROCE), and finally, valuation, since a long growth runway can make a stock that looks expensive on near-term earnings appear reasonably priced when viewed three or four years out.

India’s next growth themes

Asked where India’s next pockets of durable growth might emerge, Agarwal spoke about sectors benefiting from import substitution and policy support. These include defence manufacturing, electronics and chemicals, alongside newer-economy businesses such as digital platforms, online brokerages and electric vehicles. He noted that in some of MOAMC’s existing portfolios, 30-40% of holdings are in businesses that did not exist a decade ago. This is a sign of how rapidly the investable universe is evolving.

For the Quality Fund specifically, Agarwal said that the portfolio will likely be even more concentrated than the firm’s other offerings at around 20-25 stocks. This reflects a narrower universe of companies that combine high growth with high quality. The team first identifies promising sectors, then screens for the highest-quality names within them, before applying valuation filters.

Exits, he said, come in two forms. It can be a happy exit, where a stock performs well, becomes expensive, and capital is redeployed into a similarly high-quality opportunity, and an unhappy one, where the original investment thesis breaks down. “We encourage managers to admit that it has gone wrong,” Agarwal said, arguing that acknowledging mistakes quickly protects investor capital better than waiting them out.

Risk, volatility and the long game

On risk, Agarwal argued that quality-focused portfolios should, in theory, be less volatile than typical growth funds, since companies that fund their own expansion are less exposed to sudden shocks when external capital dries up. He also stressed minimising errors of commission by avoiding being the first mover into untested ideas, preferring instead to let a trend prove itself before committing capital.

Asked to sum up what investors should expect from the new fund, his answer was direct: “Lower volatility… something that you will keep growing with for a long period of time.”

Watch the full interview now:

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