Domestic rates are at a peak and, Anil Rego, Founder and Fund Manager at Right Horizons, believes that the market has priced in the expectations of rate cuts from the last quarter of this fiscal.

Rego sees opportunities in auto ancillaries focused on the EV (electric vehicle) play, building material segment, capital goods, structural tubes, financials, and consumers.

The strong domestic macro fundamentals, investment-led infra cycle, and strong domestic demand will be tailwinds for the sectors driving the healthy earnings trajectory following a contrarian style, the ace investor, seasoned for over three decades, shares in an interview to Moneycontrol. Excerpts from the interview:

Do you see a positive note at the beginning of the financial year in view of the corporate earnings?

Earnings growth was muted initially as expected since the early bird IT sector is facing short-term headwinds due to challenging times in advanced economies. However, earnings at an aggregate level improved with a healthy season marked by a strong domestic economy, cool-off in key commodity prices, moderating easing inflation, and resilient domestic demand.

Considering factors collectively that are tailwinds for domestic companies the improvement on the margins front as expected has also been a positive.

Do you see the ratio of upgrades over downgrades improving significantly in the coming quarters?

High-frequency indicators have trended higher domestically which is likely to translate into healthy demand momentum. We expect banks, automobiles and ancillaries, consumer and industrials are likely to contribute to incremental earnings. Considering the multidecadal growth outlook this investment-led infra cycle will benefit a diverse range of sectors providing opportunities for mid and small-caps to grow at a robust pace.

Also read: Devil in the details: How Zomato didn’t turn in a profit before tax, but a profit after tax

Further, as the environment around the advanced economies improves and export demand strengthens, companies that are export-driven will likely report better numbers in the medium term. Against this backdrop, the ratios may likely improve.

Should the market be worried about another Fed funds rate hike expected in September or November policy meetings?

The Federal Reserve has raised its key interest rate by 0.25 percent taking it to 5.5 percent, the highest level in 22 years, as it continues to fight persistent inflation. FOMC has signaled a likely quarter-point hike implying rates are near peak levels.

Domestic rates are at peak levels and markets expect rate cuts from the last quarter of the current fiscal. We believe markets have priced in this information and are driven by optimism that is supported by a diverse factor that is bullish for the economy and given earnings are growing at a healthy pace.

Is it time to enter into the pharma space or is it too late now?

Indian pharmaceutical companies have proven to be reliable for global pharmaceutical companies over the years. Indian companies are better placed to utilize opportunities as they are competitive globally and hold a considerable market share in most markets. Topline is expected to grow at a strong pace driven by market share gains in newly launched products, continued emerging market growth will further boost sales for large companies, and diversified players.

Also read: India at centre of attraction as Morgan Stanley, S&P turn bullish on economy

Opportunities in the API (active pharmaceutical ingredients) segment would be growth drivers over the long term; while short-term, cost pressures are likely to be headwinds. We have a neutral view of the sector and be watchful of API and CDMO (contract development and manufacturing organization) players for recovery in revenues.

Do you think the rising oil prices can be a setback for the market?

Oil is an input for several industries and a rise in prices will increase input costs and impact margins. However crude oil prices had eased in the past few months and OPEC+ was struggling to reduce supply adequately to counter sluggish demand. The spike in prices is not significant to be a major setback for the market as the outlook is driven by relatively better fundamentals.

What could be the big story or theme for the next 10 years in India?

We see opportunities in auto ancillaries focused on the EV (electric vehicle) play, building material segment, capital goods, structural tubes, financials, and consumers. The strong domestic macro fundamentals, investment-led infra cycle, and strong domestic demand will be tailwinds for the sectors driving the healthy earnings trajectory. Selective names within the space with relatively better growth will likely outperform peers.

Also read: Fitch re-rating US won’t impact India, says S&P Global’s Atul Arya

Building Material

We are optimistic about the building materials demand outlook due to increased investment towards infrastructure, urbanization, and a recovery in the housing and commercial real estate markets. In the recent Financial Budget 2023-24, the government has proposed to increase the funds for PM Awas Yojna by 66 percent, making it Rs 79,000 crore boosting the pace in affordable segment housing in India. Additionally, the government has proposed investing heavily in transport infrastructure projects benefiting the real-estate markets across India, especially in Tier-2 and Tier-3 cities.

Auto

The sector is in a cyclical uptrend supported by a sharp recovery in urban demand and a shift in preference toward EVs. Long-term fundamentals remain intact, and we expect a gradual recovery in rural demand.

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. The corporate segment is gradually recovering, and a pick-up in capex would be crucial to maintaining growth momentum.

Do you expect a flood of IPOs in the coming months given the stable equity market environment?

A stable bull market environment, growing economy, optimistic investor sentiments, and strong fundamentals of corporates is an ideal time for companies to go public as it provides a favourable climate for raising capital, commanding higher price multiples, and higher liquidity in the market for subscription.

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 taking any investment decisions.