Is it time to look at large-, mid-cap IT companies? Why Sumit Poddar is bullish on this domestic theme

"Domestic stories are looking attractive as of now given the narrative of global slowdown. IT stock valuations have corrected quite a bit from the top as such, but these businesses are not going to topple in a recessionary period.
They have already seen the downtick of the 2000s," says Sumit Poddar, Founder & CIO, Tikona Capital. Edited excerpts.

I was reading your note and there were very intriguing and interesting concepts. But the takeaway for me was the fact that you think that we are in an Amrit Kaal in India. We are perhaps in a Goldilocks moment. Explain to us why you think so?
At Tikona Capital, basically we are Sebi-registered investment advisors as well as Sebi-registered research analysts. You have brought in a very intriguing point. This note has come up as a thought primarily because we have been getting a lot of questions from our clients as well as participants saying that we are in an uncertain period where the QT looming. We do not know whether recession is coming in or when it is coming in or how severe it is likely to be? They have been calling it uncertainty. So yes, to give you some background, what we are seeing is that India has corrected much less as compared to many other markets.

If we look at the larger developed markets, they have corrected almost 30-35% from their peaks as well as they have gone down to June-lows as we saw at the end of September 30. But India remains a bit of a decoupled as far as the numbers are concerned. While on the trade basis, we will definitely not be decoupled immediately but there are some signs that are coming up. So coming back to the concept of whether this is a risk or it is an uncertainty, we went back and tried to examine whether this is an uncertainty and the unknown risk which has cropped up. So, there is definitely a very good analogy that we could find out.

After 20 years of covering capital goods and 10 years of not really looking at it, do you get a sense that ABB, Siemens, L&T and various other power and infra companies have a lot of earnings potential?
Definitely, I mean the spending has definitely taken a bit of a turn as compared to what it used to be in the past. I had been covering capital goods and at that point in time that was largely power-driven capex. But today it is more an industrial capex and maybe a smaller capex, which is more of an automation. A bit of digitisation in areas of food processing, pharma is where the larger capex is picking up. Especially at a time when PLI schemes are being introduced, we are seeing bouts of capex in these areas.

The capex we had seen at that point in time is totally different from the capex currently happening. Globalisation is a big theme and we can benefit from it. Within this, manufacturing is definitely playing out quite well. We need to look at these capex stories, but at the same time even the second-level order impact could be there, which we are already seeing. While there could be some slowdown as far as the growth expectations for the next two-to-three quarters are concerned, they are definitely gaining market share compared to China and many others in the trajectory. These uncertain or maybe unknown risk periods are likely to bring in the valuations to levels which can be quite attractive.

Also, could you talk about IT, generally we do not see IT stocks falling more than 20-25% from the high because of the balance sheet, the sort of communication they do in the market. What is the sense that you get with large-cap or mid-cap IT companies, do you think it is time to look at some of these names?
Domestic stories are looking attractive as of now given the narrative of global slowdown. Nonetheless, IT stock valuations have corrected quite a bit from the top as such, but these businesses are not going to topple in a recessionary period. They have already seen the downtick of the 2000s. So they are unlikely to topple but, at the same time, maybe long-term investors should definitely look at that depending on how much he or she already holds in their portfolios. But, let this recessionary period get into a known period as far as the IT sector is concerned. As of now, we are much more bullish on the domestic stories where the unknown risks are a bit lesser as compared to the global businesses.

Give us examples and instances of sectors and stocks that you have spotted in terms of your multi-decadal theme. I know you have laid out six multi-decadal themes but, in terms of stocks, how do they convert?
The three themes that we are preferring as of now are largely financialisation, formalisation and consumerism. Within financialisation, let us consider the large private banks, and within large private banks stocks like ICICI Bank will still come out as a winner because they are investing a lot in as far as digitisation is concerned.
It is not just about investing in digitisation. It is about investing in ecosystems. So, they have been at the forefront of ensuring that the banking ecosystem is in place and that is why they are likely to be the winner as far as the private banking space is concerned.

Similarly, despite the valuations, AU Small Finance Bank has a good leeway as far as the growth runway is concerned. Similarly, on the consumerism front, I think QSR or for that matter even footwear, apparel seem to be quite attractive, primarily given the fact that once we cross per capital GDP of 2000 dollar, which we have crossed in the past two years, incremental discretionary spending is likely to see much larger growth. And what is happening with these retail guys or QSR apparel guys is largely that Tier-II economics are far better than the metros.
Tier-II economics, in terms of footfalls, rentals, consumption demand are picking up. Covid-19 has changed the dynamics.

A lot of migration that used to happen to Tier-I or metro cities is largely not happening any more. Most people have been able to get work-from-home opportunities in Tier-II cities. Similarly, in formalisation, we are seeing GST numbers going up. That is largely because most of the informal sector businesses have to be converted into formalisation. Largely, the beneficiary of this particular theme is building materials and even the ones I mentioned earlier – be it QSRs, footwears or apparels. So, all these themes definitely are likely to play out well over a couple of quarters as well as a multi-decadal theme.