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    IT sector will make a comeback in 2023: Sumit Poddar, Tikona Capital

    Synopsis

    “In addition to handling the crisis quite well, India also thrived in this particular situation. As per the anti-fragility concept of Nassim Taleb, when anything or any organisation, country or society, thrive during a period of crisis, they build in anti-fragility which is what India built in as far as 2022 is concerned. ”

    Sumit PoddarNEW-Tikona-1200ETMarkets.com
    "While the first two quarters could be in a watch mode for IT, from an annual basis, it will be back in favour. It has corrected dramatically as far as 2022 is concerned. It will be back in 2023, may not immediately, but definitely 2023 will see the comeback of the IT sector," says Sumit Poddar, Founder & CIO, Tikona Capital

    2022 is getting over and 2023 coming in. What sort of themes do you expect? Do you expect it to be a more polarised market this year? IT has gone down, banks have done well; new technology has gone down; defence has done well. Do you expect sectoral churns to continue?
    Standard disclosures apply as far as our firm is concerned. We are a Sebi registered intermediary. Let me take a bit of a pause and try to put in some key learnings as far as 2022 is concerned.

    India delivered a very strong equity outperformance and that was primary because of the good things that were done during the crisis. We did not leverage out and debt to GDP was quite strong even with the geopolitical situation. I think India handled the situation quite well. The whole world grappled with inflation but India could actually have cheaper crude being sourced which ensured that stability is in place.

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    So a combination of relative inflation handling as well as the stronger balance sheet helped us take care of this crisis situation quite well. On top of it, in addition to handling the crisis quite well, we also thrived in this particular situation as per the anti-fragility concept of Nassim Taleb. Taleb mentions in his book that when anything or any organisation, country or society, thrive during a period of crisis, they build in anti-fragility which is what India built in as far as 2022 is concerned.

    We saw that the crisis was quite well handled but at the same time, we demonstrated well on mass scale adoption of technology and the India stack.

    On top of it, we were in the leadership position as far as global platform is concerned and all this led to our outperformance and a $20 billion selling by FIIs in 2022 was fully absorbed by domestic investors. That is the backdrop as we are entering in 2023. is concerned.

    We saw IT going down, all the new age companies going down, banks outperforming, and on top of it, while we may see that the whole year is just a mid single digits, there are sectors that have delivered handsomely like PSUs and to a large extent banking per se. All that was offset definitely by IT. Now coming to 2023, interesting themes are emerging.

    Last January, IT companies PE multiples were as high as 30 plus; this time around earnings cuts have happened, stocks have underperformed and PE multiples are low, but they are still higher than averages. What is your sense about IT? What are they pricing in now?
    The IT sector has a cash growing business model and the ROCEs and ROEs or ROICs thrown by these businesses are quite strong and remain in the top quartile despite the slowness that is expected. Another trend or area that we need to focus on is that this time the IT cycle is different compared to what happened in a couple of cycles earlier.

    Indian IT services are totally engraved into the global technology supply chain as such. Secondly, earlier, technology was being used for scale, bringing down cost and there used to be large scale transformation projects. Post Covid, most of the projects are small and they are not very large-scale transformational projects.

    Thirdly, without technology, none of the businesses can either grow or maintain scale. These are the differences which entail a relative premium as compared to the past two cycles. In addition to that, we have been talking about recession since the last almost 6 to 12 months. This was a higher interest rate induced or higher inflation induced recession narrative.

    Most of the time, if there is a drastic or dramatic fall in any of the sectors or markets, when any unknown unknown event crops up or if there is a surprise. To a large extent, the narrative related to recession is getting priced in. People know about it and even corporates can plan it well as compared to shock of recession. I think while the first two quarters could be in a watch mode for IT, from an annual basis, it will be back in favour. It has corrected dramatically as far as 2022 is concerned. It will be back in 2023, may not immediately, but definitely 2023 will see the comeback of IT sector.

    Last time you very clearly pointed out to us that the companies to watch out for in the next decade will be the new age companies. Whether they make money, survive or not, or whether listing happens or not, real wealth will be created over e-tech. We have seen a significant supply-led correction. How should one evaluate these companies?
    There was a bubble as far as the valuations of these companies were concerned primarily because everything was GMV related. If we compare GMV to what eyeballs were during 2000, that was the case. But what happened during 2022 will at least bring in sanity and that is why we are pointing to 2023 as a year of execution as well as moderation. On top of it, any or every company which is focussed on how to execute best on the top line, on the profitability as well as the capital efficiency, will gain in this particular period.

    Many of the business models or new age business models have corrected well. While the valuations are not yet attractive, at least they are far lesser than what they used to be. But as an investor, we need to continuously stick to the basics in terms of businesses which are creating a competitive advantage will survive this carnage.

    There are a couple of models on the PPC side, which is creating a bit of a differentiation or niche segments where there are very less listed entities. Those are the ones like Nykaa which could see a bit of a comeback as far as this year is concerned.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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