Anil Rego of Right Horizons PMS
“We are bullish on capital goods sector long-term due to sector tailwinds. The capex upcycle will witness infrastructure, power, renewable, petrochemicals and defence investments for the next few years,” Anil Rego of Right Horizons PMS said in an interview with Moneycontrol.
He prefers companies with solid and diversified order books, the scope for margin expansion and healthy cash flow generation as the demand outlook remains buoyant.
The founder and fund manager at Right Horizons, a pioneer in the contrarian style of investing and a seasoned investor for over three decades sees earnings growth in double digits in FY24 and banking to lead the pack, with Auto, capital goods and consumer to follow in FY24.
Also read: Daily Voice | Banks can show double-digit earnings growth in coming quarters: Kotak Mahindra Life’s Hemant Kanawala
Q: If the Fed pauses rate hike cycle, do you think the RBI will cut repo rate by 100 bps from the last quarter of 2023 onwards?
The CPI inflation has been on a downward trend decreasing from a peak of 7.8 percent in April 2022 to 5.7 percent in March 2023, and the WPI reading is coming in at single digits for the past few months; we expect the downward trend to continue.
Inflation is expected to be under RBI’s upper tolerance band in FY24. An interest rate cut in India is expected to begin next year, along with advanced economies, since inflation is declining gradually. On a cumulative basis, RBI has hiked rates by 250 bps taking the rate to 6.5 percent, which is expected to be at the same level for the rest of the year.
Q: When should one start buying IT stocks?
We expect the quality names in the Midcap IT space to lead the pack with sequential growth on a constant currency basis, but H1 of FY24 will likely be challenging as growth moderates. Margins will likely expand for most companies in FY24 due to the easing of supply-side pressures and operational efficiencies. We will keep an eye on the demand outlook, deal TCVs and pipeline, vertical & geography commentary, vendor consolidation opportunities, attrition & margins outlook.
Digital transformation is a multi-year growth driver for the Indian IT services industry, making it a secular growth story for the sector. Historically a recession in US or EU has amplified the long-term growth potential, so we expect the weak macro environment as a positive sign for the long term, and with attrition peaking and margins bottoming out, long-term investors are recommended to accumulate as demand picks up, and the interest rate is cut later.
Q: Do you see earnings growth for FY24 above 15 percent? Which sectors can be in the driver’s seat?
We see earnings growth in double digits in FY24 and banking to lead the pack, with Auto, capital goods and consumer to follow in FY24.
Banking
The banking space is witnessing robust credit growth momentum driven by the continued traction in the Retail and SME segments. On a segmental basis, home loans, Auto loans and Credit card outstanding continue to grow, and corporate loans are recovering gradually. However, deposit growth continues to lag credit growth, so focus on mobilising deposits is a key monitorable. In the third quarter of FY23, NIM expanded, and asset quality was benign.
Within the NBFC space, AUM growth, steady NIMs and improving asset quality were witnessed for key players. Growth across segments was upbeat, and traction in new business was driven by expanding distribution network. The disbursal momentum for housing financiers is likely to sustain, leading to healthy AUM growth.
We expect in 4QFY23; systemic loan growth will continue to be strong, with solid credit growth supported by ongoing growth in the retail and SME segments. The corporate segment is gradually recovering, and a pick-up in capex would be crucial to maintaining growth momentum. The margin trajectory will be influenced by the rise in the cost of deposits and further rate hikes. The asset quality should continue to improve in Q4FY23.
Auto
Though Stable demand is expected in Q4FY23, volume growth will likely moderate in some segments, and exports will likely be weak for two-wheelers due to weak global sentiments. We expect operating margins to improve for OEMs led by the benefits of RM cost moderation, and operating leverage. We expect a recovery in exports in a couple of quarters down the line.
Capital Goods
We are bullish on the sector long-term due to sector tailwinds. The capex upcycle will witness infrastructure, power, renewable, petrochemicals and defence investments for the next few years. Additionally, private capex is rising in pharmaceuticals, beverages, food processing and automation industries. We are expecting strong revenue growth in Q4FY23 for companies with robust order bookings.
We prefer companies with solid and diversified order books, the scope for margin expansion and healthy cash flow generation as the demand outlook remains buoyant. In addition, price hikes, operating leverage, and declining commodity prices will improve operating margins.
Q: Is it the time to start accumulating export-focussed sectors or is it better to stay with domestic-focussed themes?
The PLI scheme is influential in the government’s plan to make India a global manufacturing hub and the FTA (free trade agreement) a propeller for increasing exports. In FY24, capital goods, FMCG, pharmaceuticals, consumer durables and logistics likely see a stronger capex.
At present, India’s share of global exports is below 2 percent as against China’s 15 percent. The conducive policies incentivising exports and the government’s focus on signing FTAs with larger economies will present valuable opportunities and likely increase the share of currently exporting key commodities.
The two levers will set off a multiplier effect and likely lead to demand in exports of petroleum products, automobiles, chemicals, pharmaceuticals, electronics, engineering goods, textiles, and iron & steel in the forthcoming years, with semiconductors and hydrogen over a longer horizon. However, in the short term, we expect a softening of exports due to a slowdown in the global economy and prefer domestic themes.
Q: Are you super bullish on chemical sector for the coming years? Should it be a part of portfolio?
The slowdown in the global economy has impacted exports, and as input prices have corrected, margins have started improving. We expect demand to improve in the next two quarters, and as a result, selective names can be looked for to add to the portfolio.
Q: What do you make out of ongoing corporate earnings season and management commentary?
The revenue growth is expected to be in the low teen digits in the last quarter of FY23 due to headwinds continuing for exports. Revenues of commodities and export-oriented sectors have been weak. The operating profit margins are slightly better as commodity prices are normalising after a correction, and prices of key energy-linked commodities such as crude oil and others have come off their peaks, offsetting the impact of a slowdown in global demand on the profitability side.
Q: Do you expect significant FII inflow into Indian equity markets in the current financial year as the Federal Reserve signals a pause in the rate hike cycle?
We anticipate rate hikes will be paused in US, Euro, and India for the rest of the year and the dollar index to peak. So emerging markets like India, with relatively better fundamentals and a stable domestic demand with a multi-decadal growth outlook, witness inflows.
Unlike advanced economies where the earnings of corporates are not pricing in for a recession, Indian Inc companies are expected to report growth in earnings in the low teens, which will likely be supported as key sectors will witness inflows.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before making any investment decisions.