The Golden Thumbrule: From Hated to Hot - Aniruddha Sarkar on spotting sector turnarounds before the crowd

Economic Times

10-07-2025

In a market where sentiment can swing faster than fundamentals, identifying a sector turnaround before it becomes a consensus trade is nothing short of a superpower.
Aniruddha Sarkar, CIO and Portfolio Manager at Quest Investment Advisors, has built a reputation for doing just that—spotting inflection points in sectors long before they capture the market's imagination.
In this candid conversation with Kshitij Anand for 'The Golden Thumbrule' series, Sarkar shares the golden thumb rule that has guided his investment decisions, how he identified the meteoric rise of PSUs, defence, and power stocks, and why being early (and often contrarian) can be the biggest edge in wealth creation. Edited Excerpts –
ADVERTISEMENT Kshitij Anand: Well, you've hit the nail on the head that the time of making easy money is behind us. Let's quickly hit the ground running. So, according to you, what is the single most time-tested rule for wealth creation and preservation in Indian equities?
Aniruddha Sarkar: See, one thing I've observed over the last 18–20 years in the Indian markets—and to some extent this holds true for most emerging markets—is that the beauty of emerging markets like India is that almost every year, you find new companies, new sectors getting listed, raising capital. There's always some policy change happening—be it local or global. I would say international realignments of policy are occurring, and thanks to Mr. Trump, we've seen those happening more frequently these days.
So, I would say the single most important rule for wealth creation—especially in the Indian context—is to be early in identifying a sectoral theme. Be there before others, and that's where we've seen the biggest wealth creation happen. There are ample examples. If you look at the last 10, 15, 20, even 30 years, any big wealth creation—from the IT boom of the late '90s to any other major rally—has always been about catching a sectoral theme early on. Be invested while the theme is playing out. Don't exit early. That's very important. Don't exit early, and that's where both wealth creation and preservation happen.
Kshitij Anand: In fact, you often talk about catching sectoral changes early. Honestly, that sounds like a superpower to some. I'm sure it's easier for you, but can you walk us through your personal playbook for identifying these shifts?Aniruddha Sarkar: As you mentioned, I often get asked how to identify a sectoral trend. And I always say, there's no magic formula, to be honest. Also, there's no one—at least to my knowledge—who has been able to identify every trend 100% of the time. You actually don't need to be right all the time. Even if you get it right 75% to 80% of the time, your job of beating the market is done.Now, as for what I look for to identify sectoral trends—first and foremost is capital allocation. Where in the economy is capital moving? That's a strong indicator of where the next big growth area is likely to come from. And businessmen are no fools—they know where to invest for returns. So, I always say: follow the capital flow in the economy.
ADVERTISEMENT Second, a good sign is any big change in consumer behavior. That also gives you a strong signal. For example, if you talk about EVs, is there a shift in consumer preference from petrol-diesel vehicles to EVs?Now, linking back to the earlier point on capital allocation—are companies like Mahindra and Tata investing more and more into EV manufacturing? That's a cue. And then, does consumer preference reflect that shift? That's the second big factor.
ADVERTISEMENT The third is technological change or innovation. Is there a fundamental change in the traditional way of doing things? And again, is capital flowing toward this innovation? Take renewable energy, for instance. Over the past few years, we've seen significant capital moving toward it. The cost of solar power production has dropped sharply, making it commercially viable. This is a classic case where technological innovation, supported by favorable economics, signals a long-term trend.Lastly, the fourth factor is government policy. Is there a policy push that supports the sector you've identified? Again, using renewable energy as an example—the government has been highly supportive. They've offered incentives, promoted rooftop solar panel installations, and enabled benefits like feeding excess power back into the grid. All these are signs that government policy is aligned with innovation and capital flow.
ADVERTISEMENT So, in summary: watch where the capital is moving, understand consumer behavior, observe technological shifts, and track government policy. All in all, you just need to keep your eyes and ears open to what's happening around you.
Kshitij Anand: Well, for Gen Z, it's not just about what new movie is releasing on Friday, but also about tapping into what's happening in the government's space, which will ultimately dictate the sectors that will create wealth for you in the coming years. Now, let me quickly move on to a slightly nerdy question, if I may say so.
How do you separate a short-term buzz—more like a cyclical tailwind—from a long-term boom, which is more of a secular trend? Because, let's face it, both can look shiny at first. For example, EVs seem more popular, more trendy—it feels cool to be driving around with a green number plate. What are your thoughts on that?
ADVERTISEMENT Aniruddha Sarkar: No, absolutely. In fact, you've rightly mentioned it. In the initial days—or I would say in the first few months—it's very difficult to differentiate between what's a cyclical trend and what's a structural change. Initially, everything looks like a big shift. But only after a couple of quarters do you realise that it was more of a cyclical change than a structural one.So, I would say there are four to five key parameters that help you figure out whether something is long-lasting or just short-term. The first factor is time horizon and consistency. Typically, cyclical trends pick up during economic booms and fade during recessions. A good example would be infrastructure, cement, or metal consumption. These are typically cyclical. At the peak of an economic cycle, demand for cement and metals goes through the roof. And honestly, it's very hard to time the metal or cement cycles—but that's just how cyclical patterns behave.On the other hand, a secular trend continues across multiple business cycles. Something that picks up during the good times continues to perform even during downturns, and then builds further during the next upcycle. That consistency is the key difference.The second factor is the source of growth. Typically, cyclical upmoves begin with government stimulus—like what we often see in China. Whenever China announces an economic stimulus, metal stocks and the real estate market there suddenly boom. And as soon as the stimulus fades, everything comes back down.
Kshitij Anand: Something similar to what we saw with the PLI schemes, perhaps?
Aniruddha Sarkar: Absolutely. The PLI schemes were introduced across 14 industries, but structural upmoves happened only in a few. All 14 didn't show significant long-term impact. So yes, some benefited structurally, while others saw only a cyclical boost. As I mentioned, if the growth is driven by external factors like policy stimulus, it's usually cyclical. But if it stems from deeper changes like innovation or consumer behaviour, it's more likely to be secular.The third difference I observe between cyclical and secular trends is in valuation and fundamentals. In a cyclical upmove, stocks go from being cheap to expensive in a matter of six months. But in a secular trend, this journey takes much longer—and once valuations peak, they tend to sustain at higher levels for longer rather than correcting quickly. That's a clear behavioural signal.The last big difference is in what companies do with their capital. In a cyclical upcycle, companies often don't know what to do with excess capital. So, they return it to shareholders through buybacks, dividends, or bonuses. In contrast, in a secular trend, companies invest that free cash flow into growth. That's a powerful signal.A good example is the IT sector. During the earlier secular boom, companies were investing in themselves—setting up campuses, expanding globally. Today, the same companies are paying out large dividends, doing buybacks, and bonuses—which suggests they aren't finding enough avenues to deploy capital productively. That's another strong indicator for distinguishing between a cyclical and a secular uptrend.
Kshitij Anand: My next question is quite literal—zero to hero, you could say. We've seen sectors like PSU, defence, power, and real estate go from being boring to becoming market darlings within a matter of months. What are the early signs that a sector turnaround is for real, and not just hype?
Aniruddha Sarkar: You've nailed the sector names. In fact, I remember just 24 to 36 months ago, when I had launched one of my AIFs, these exact sectors—PSU, defence, power, energy, real estate—had a significant chunk of my portfolio allocation. I had a tough time explaining to investors why these sectors deserved attention.But now, the same investors are the ones telling me why these sectors are worth looking at. That shift in perception itself says a lot…
Kshitij Anand: The story has turned around.
Aniruddha Sarkar: Absolutely. So, this kind of answers your question about the types of sectors or signals that tell you which sectors to look at and bet on. I would say PSUs, in general—within PSUs, you have multiple categories: PSU banks, defence stocks, energy stocks.If I put it differently, what gave me an indicator—and this goes back to those days—was that, in banks, all the operating metrics of those coming out of the NPA cycle were improving. We had SBI and other PSU banks quoting at 0.4–0.5 times price-to-book. Their ROEs and ROAs were either in low single digits or even in the negative zone.Now, if you're coming out of an NPA cycle and you've already done your provisions, then the question is—what could be worse? That was the bottom. From there on, the numbers only improved. So, when it comes to PSU banks, improvement in operating metrics was the first indicator.For PSUs related to defence, the big boost came post the Ukraine war. When the war started in February–March 2022, the world woke up to the need for strong defence. Thankfully, post-COVID, India was already moving towards Atmanirbhar Bharat and Make in India. The government realised that we couldn't depend on others for defence needs. That's when defence became a major focus—modernising and indigenising our defence equipment. That marked a key shift for PSU defence companies.The third big sector within PSUs is power and energy. If India is to grow at a 6%+ GDP rate for the next 10 years, we must have adequate power supply. And power, unfortunately, cannot be imported—not at scale, at least. Yes, to some extent, we can import from neighbouring countries, but even they depend on us. So, importing power isn't really an option. Hence, the government push for capex in the power sector intensified.All these were the big triggers for identifying PSUs—particularly PSU banks, defence, power, and energy—as sectors that were coming out of the woods. It was time to bet on them.
Kshitij Anand: If I can just ask you to dig into your memory vault—could you share one investment where you spotted a sector early and it played out beautifully for you? What gave you that conviction? Any bullet points you'd like to highlight?
Aniruddha Sarkar: I'll give an example from a completely different industry—since we've been talking about PSUs, power, and defence. This example will help investors understand that sectoral upcycles can happen in any sector.One early trend we identified, which worked well for our investors, was the capital markets theme. If you're betting on more and more household savings moving into equities, then the question becomes: who are the biggest beneficiaries of that shift?We broke it down: the key participants in the capital market are—ExchangesBrokeragesWealth management firmsAsset management companies (AMCs)Intermediaries like KFintech, CAMS, and CDSLThese are the only five categories that provide exposure to the Indian equity market. So, are they all going to benefit? When we dug deeper, we found that all five subsectors were poised for exponential growth.We took early exposure to exchanges, and we've all seen how listed exchanges have performed over the last couple of years. We also invested in asset management companies, based on the premise that mutual fund folios and assets would grow both organically and inorganically. AMCs benefit from operating leverage—managing ₹50,000 crore today versus ₹5 lakh crore tomorrow doesn't require a 10x increase in staff. That's where margins expand.
Third, we invested in wealth management firms. With more affluent Indians, the demand for professional wealth management is only increasing. And finally, we took positions in intermediaries like CAMS, KFintech, and CDSL—natural beneficiaries of rising folios in mutual funds, AIFs, and PMS products.
This is a classic example of identifying a big sectoral shift, recognising its key beneficiaries, and then zooming in further to pick the strongest players within each category.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)