Are valuations attractive enough to go back to IT largecaps? Sunil Singhania answers

Sunil Singhania, Founder, Abakkus Asset Manager LLP, says it is possible that one or two quarters’ growth rates might be not as good as they used to be earlier. But these are companies which make decent money. They are globally competitive and they have almost 100% cash conversion of profit and they distribute almost 80-90% of that. In fact, year to date, there are so many IT services companies which have gone up like 30-40% on the midcap side and even in largecaps, quite a few IT services companies have done much better than Nifty

You have been shopping a lot and that is what the bulk deals are indicating – from Uniparts to Dynamatic Technologies, Mastek, Ion Exchange in the small and the midcap space. Are you following any kind of a theme or are these company specific investments irrespective of what the sector is doing?
We can talk about themes and all but the biggest theme for us is as follows. We invest in companies which make profit where there is visible profit growth and what we pay today would be more than repaid back to us by way of future profitability. Across the board, across our names, these are the themes which we will see in common.

Obviously, there will always be some sectors which do well from time to time. Companies which have done well for us are companies where there has been good respect as far as capital allocation is concerned and where there is profit growth. Companies which have not done well are the ones where profit growth has faltered. This is a very simple way of investing but simplicity works.


What is your view on banks given that right now there is a consensus view that banks are the way forward as credit growth is strong, NPAs are down, this entire Rs 2000 note move by the government maybe could help some of the banks in garnering deposits on the margin. Do you think banks are more like a consensus view and a consensus trade?
In any economy, in particular, in a growing economy, financial services and banks will play a major role. In Indian markets, banks and financial services are almost 35-40% of the economy as well as the markets. So, it is very natural for most investors to have a decent allocation to banks. Having said that, there are a few things; one is that profit growth looks to be very strong in the next two years.

Interest rates seem to have peaked and at the margin, you might see interest rates coming down and banks normally are inversely correlated to interest rate in terms of their price performance.

Third, the practices of banks have improved quite dramatically and so the incidence of NPAs or credit costs should be much lower than earlier. And there is huge regulatory protection. One just cannot set up a bank overnight. There is regulatory protection to existing players and therefore there is a moat.

Having said that, I do not think the near term moves of Rs 2000 note has any merit in becoming positive or negative because of that. Structurally for the next three-four years, if the economy is to grow from 3 trillion to 6-7 trillion, financial services will play a major role and will continue to be quite constructive on the bank. The only thing about banks is names. Where there is a good brand name because from a banking perspective, deposits as well as cost of deposits, is the raw material and the better you are there, the more competitive you become.


You bought very differentiated IT names in the past and one classic call has been Route Mobile which has done rather well for you. I can see there is ICICI Securities which is a blend of both financial services and technology. Since everybody knows that the nature of the economy is moving more towards digital, what is the best way to participate in it?
Irrespective of which business you are in, every business will have to have a digital strategy. So more than what is the best way to participate, one has to be very clear about staying away from companies which will not adapt themselves to embracing this truth. You mentioned EVs. Even if there are no direct plays, at least avoid companies which will get impacted because of the EV play.

It is a similar case with digital. Having said that, there are quite a few good names which got listed and hats off to them for creating businesses out of nowhere and hiring hundreds and thousands and lakhs of people in India; a lot of them do not fall into our criteria of being profit making and having decent return on capital employed.

Therefore we tend to avoid it as we do not understand those businesses. But I am very sure that there are other smarter fund managers who would understand those businesses. So from an investor's perspective, depending on their risk appetite and depending on their philosophy, there are quite a few names available where they can definitely look at investing.

Is it a good time to revisit largecap IT, the classics and buy them at the time of downturn, sell them at the time of upturn? Are valuations attractive enough to go back to IT largecaps?
No, sometimes when you listen to the technology experts, it is a little scary particularly for financial people like me. They talk about ChatGPT and AI and all taking away jobs but then I am reminded of the last 50 years, starting from the movie Naya Daur where in a village the Tangewalas get threatened by the motor bus which comes in to computerisation which happened and Indian bank employees went on strike to even Y2K and post Y2K and so on and so forth. Indian IT services in one sector which is globally competitive. We discussed that every company needs to have a digital strategy and there is going to be a huge opportunity for Indian IT services companies there.

Yes, in the near term we do not know. It is possible that one or two quarters growth rates might be not as good as they used to be earlier. But these are companies which make decent money. As I said, they are globally competitive and they have almost 100% cash conversion of profit and they distribute almost 80-90% of that. In fact, year to date, there are so many IT services companies which have gone up like 30-40% on the midcap side and even in largecaps, quite a few IT services companies have done much better than Nifty. So despite all these concerns and slowdown and so on and so forth, the sector has done relatively well year to date.

On a one year basis, it has underperformed because in the previous year, it had done very well but the prices are not indicating a horror show. In fact they are indicating that if things settle down, there might be an upside surprise here. We are not extraordinarily overweight but we are not underweight also.