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  • Writer's pictureTikona Capital

Stay invested, we are not in a bubble zone, but remain watchful: Sumit Poddar, Tikona Capital



Synopsis


Sumit Poddar discusses the mixed outlook of the market, strong SIP flows, Q3 results, opportunities in smallcaps, and his view on the paint sector, including the entry of Grasim and the importance of the distribution side for competition. Poddar also says "rather than looking at the size of the company, we are looking at the opportunity that these companies are offering. We are not necessarily buying it because it is either a smallcap or a midcap." Sumit Poddar, Founder & CIO, Tikona Capital, says “the top line was not really that healthy and some of the sectors were literally disappointing. But at the same time, some of the sectors took the leadership and metals and oil and gas literally showed very good results. Banking as well as auto helped a bit. But at the same time, there were mixed outlook as far as the future is concerned. Nonetheless, given the strong flows that we have of almost Rs 20,000 crore of SIP, it is helping the markets and which is despite the concerns, despite the fear of highs, we are not seeing that kind of correction as one should or that may take place.”



So, let us begin by discussing the market setup itself. In January, there were a lot of people who were saying that we have probably made the highs ofthis year. There are no fresh triggers available. Elections are priced in. Budget was nothing to write home about and earnings will now be on a downward trajectory, if at all, because the growth rate of earnings will come down a bit. In this context, what is a realistic return expectation from the markets this year?


Sumit Poddar: No doubt, markets have been showing newer highs and which is what is creating fear of heights in the minds of investors. 2023 was definitely a very good year and post that, we are seeing the initial part of 2024 driven largely by the positivity as well as the flows. I think we need to kind of sit back and maybe observe what exactly is happening.


Yes, earnings are quite strong. If we look at Q3, the demand may be relatively on a slower trajectory. But at the same time, the profitability is moving up. Also, there are two-three factors. First, of course, the Indian market itself is literally becoming broad-based. There are several engines. At some point, some engines really are taking a front foot, whereas some engines are taking a back foot. Look at the Q3 results.


If the top line was not really that healthy, we saw some of the sectors literally disappointing, but at the same time some of the sectors took the leadership as far as metals and oil and gas literally showed very good results. Banking as well as auto helped a bit. But at the same time, there were mixed outlook as far as the future is concerned. Nonetheless, given the strong flows that we have of almost Rs 20,000 crore of SIP, it is helping the markets and which is despite the concerns, despite the fear of highs, we are not seeing that kind of correction as one should or that may take place


In such a scenario, it is always good to stay invested, but at the same time be watchful and having said that, we are not in a bubble zone. While the valuations may be higher than what they have been in the past, we are definitely not in the bubble zone, that is what I would rather say.


I was just going through your portfolio allocation and it seems like you are still a lot more tilted towards smallcaps. Again,there is a part of the street which is worried aboutthe froth there. A lot offunds have actually stopped taking in money for the smallcap funds as well. Where within smallcaps are you finding value right now?


Sumit Poddar: Rather than looking at the size of the company, we are looking at the opportunity that these companies are offering. We are not necessarily buying it because it is either a smallcap or a midcap. So, across sectors, I am sure you have gone through our fact sheet where we are quite diversified as far as the sectors are concerned.


Let us take BFSI itself, despite the kind of numbers that they are delivering, despite the technology literally helping them, yes, even within the sector, we are finding banking and NBFCs, smaller NBFCs are literally helping the portfolio which may incidentally be happening to a smallcap. So, they are growing quite well.

Take the example of MAS Financials, which has been growing quite well every quarter. Similarly, take the case of Fusion. While they may happen to be a smallcap, they are literally growing quite healthily in terms of the overall macroeconomic growth that is happening, as well as the managements themselves making an extra effort to grow faster than the industry.


Take the case of maybe auto, auto ancillaries. Again, there are opportunities, rather it be in terms of electrification or batteries or for that matter the global manufacturing side. Incidentally, they happen to be smallcaps, but at the same time they are growing quite well and that is helping our portfolio to outperform the broad-based benchmark and helping our clients to get the returns which are much higher than a normal benchmark or kind of returns that can be just taken by the ETFs as such. That is where the opportunity is coming in from.


What is your view on the paint sector, because with the entry of Grasim,the incumbent’s market share is under threat, atleast,that is what analysts believe.


Sumit Poddar: Well, that has been the discussion since last almost three-four years and yes, entry of a new competitor in a very lucrative sector like paints where return on capital employed is quite healthy, especially looking at the numbers of Asian Paints. Yes, opportunity from an outside perspective definitely looks attractive to a person investing in that particular sector, but it is not just about entering the sector.


It is also about the fact that on the ground level, whether they are able to take up on the distribution side and things like that are going to matter much more than just the competition. Having said that, it is not just about paint per se, it is also about the opportunity that is existing, maybe that will make the incumbents much more stronger to compete against the newer player. Yes, it is a long battle. I may not really say that it is going to impact something very immediately, but over a period maybe everyone could thrive in that particular sector.

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