Daily Voice: Auto sector to be star performer this year; banks look fundamentally healthier than in the past 15 years, says Anil Rego

Anil Rego is the Founder and Fund Manager at Right Horizons PMS

• Auto sector to be a star performer this year
• Banks look fundamentally healthier than in the past 15 years
• Budget could push decisive reforms for labour-intensive industries and large-scale job creation

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"The auto sector has a strong case to be a star performer this year, supported by a rare combination of healthy demand, operating leverage, and earnings momentum across segments, said Anil Rego, the Founder and Fund Manager at Right Horizons PMS in an interview to Moneycontrol.

He believes Indian bank balance sheets are indeed in their strongest position in well over a decade. "Overall, the sector looks fundamentally healthier than it has been in the last 15 years, and the outlook is positive, anchored more in earnings and balance-sheet strength than in short-term macro or rate-cycle optimism," he said.

In the Union Budget 2026, there could be a decisive push toward labour-intensive industries and large-scale job creation, aimed at strengthening India’s employment engine as growth broadens, said Anil Rego, the Founder and Fund Manager at Right Horizons PMS in an interview to Moneycontrol.

Will 2026 be a tough year for equity markets, largely due to global factors?

Recent US actions have added layers of global uncertainty. The escalation with Venezuela is fundamentally about oil leverage rather than ideology. While headline risks around seizures and sanctions can push oil prices higher in the short term, they do not materially alter global supply over the medium term. Markets are pricing risk premium, not an actual supply shock, keeping energy prices volatile but contained. For equity markets, this translates into intermittent inflation anxiety rather than a structural reset.

Similarly, renewed tensions with Iran, including the announcement of a 25% additional tariff on countries trading with Iran, are best viewed as pressure tactics. The objective is deterrence and negotiation leverage, not immediate enforcement at scale. Even if implemented selectively, India’s direct exposure is limited due to diversified crude sourcing and its relatively low trade dependence on Iran. The bigger impact is on sentiment and freight/logistics costs, not earnings trajectories.

On trade, the proposed 500% tariff legislation in the US has grabbed attention but remains a low-probability outcome. Historically, such extreme proposals struggle to pass due to Congressional checks, filibuster thresholds, business lobbies, and legal scrutiny. Markets tend to discount these as negotiating tools rather than executable policy. As a result, exporters may see near-term pressure, but broad-based earnings impact is unlikely.

The delay in the US–India trade deal adds to headline fatigue but has had limited market impact so far. Indian equities have shown that earnings, liquidity, and domestic growth matter more than trade rhetoric. India’s economy is far less export-dependent than many peers, and services exports remain resilient even amid goods-trade friction.

Do you think FIIs will stay away from Indian markets until earnings growth returns to the mid-teens?

FIIs are currently more driven by global allocation themes than just India-specific earnings, with flows chasing AI-linked markets, while recent US-related macro and geopolitical issues have also triggered risk-off selling across EMs. That said, this selling reflects global positioning and opportunity cost rather than a deterioration in India’s fundamentals.

India continues to remain relatively strong on domestic growth, policy support, and medium-term earnings visibility, and is already deeply under-owned after sustained foreign de-risking. As global headwinds fade, AI trade crowding normalises, and earnings recovery becomes more visible, FII flows are likely to return gradually well before earnings growth fully settles into the mid-teens.

What could be the worst-case scenario in an India–US trade deal?

The worst-case scenario for an India–US trade deal would be a prolonged delay or a narrow, incremental agreement that falls short of expectations, keeping select sectors exposed to tariff uncertainty and periodic headline risk.

However, even in this outcome, the macro impact on India is likely to remain contained given the economy’s low dependence on US exports, strong domestic demand, and policy support at home. Importantly, such delays would reflect negotiation complexity rather than a breakdown in relations, and history suggests these frictions tend to ease over time allowing markets to refocus on earnings, growth, and India’s longer-term strategic alignment with the US.

Do you believe the auto sector could be a star performer this year?

The auto sector has a strong case to be a star performer this year, supported by a rare combination of healthy demand, operating leverage, and earnings momentum across segments. Recent industry data shows broad-based volume growth across PVs, 2Ws, CVs and tractors, with demand sustaining even after the festive season, while earnings for OEMs and ancillaries are expected to grow in the mid-20% range on a YoY basis, aided by GST-related demand pickup, stable costs, and better capacity utilisation.

While valuations in parts of the sector are no longer cheap, the visibility on earnings, balance-sheet strength, and improving mix (SUVs, exports, premiumisation) suggests autos could continue to outperform the broader market, especially in an environment where investors are gravitating toward sectors with tangible earnings delivery rather than long-dated narratives.

What could be the biggest game-changer in the Union Budget?

There could be a decisive push toward labour-intensive industries and large-scale job creation, aimed at strengthening India’s employment engine as growth broadens. Expectations are centred on expanded MSME schemes and targeted support for sectors such as textiles, leather, footwear, gems & jewellery, and handicrafts areas with high employment multipliers and deep linkages to rural and semi-urban India. This approach aligns with the rollout of the new labour codes, improved access to credit and infrastructure for mid-sized enterprises, and a gradual shift toward supply-side reforms.

If executed well, such a strategy can help India fully leverage its demographic dividend, avoid the middle-income trap, and lay the foundation for more inclusive, durable growth over the next decade, making it one of the most consequential Budgets from a long-term perspective.

Do you agree that bank balance sheets are at their strongest in the last 15 years? Are you bullish on the sector?

Indian bank balance sheets are indeed in their strongest position in well over a decade. Asset quality is benign, capital buffers are comfortable, and corporate deleveraging over the last 8–10 years has structurally reduced credit risk in the system.

What stands out in the current cycle is that banks are entering a phase of earnings acceleration from a position of strength rather than stress return on assets is at an inflection point, net interest margins are stabilising after the rate-cut impact, and credit costs remain contained.

According to recent sector analysis, profitability is expected to improve steadily over the next few years, with RoA expansion and operating leverage driving earnings growth, while valuations for many banks are still below long-term averages.

From a sector view, this creates a constructive medium-term setup rather than a euphoric one. The combination of strong balance sheets, improving return ratios, and potential loan growth recovery provides room for a valuation re-rating, especially as visibility on earnings improves. However, this is not a uniform story across all banks stock selection remains critical, with outcomes likely to diverge based on deposit franchises, underwriting discipline, and execution.

Overall, the sector looks fundamentally healthier than it has been in the last 15 years, and the outlook is positive, anchored more in earnings and balance-sheet strength than in short-term macro or rate-cycle optimism.

Is this a better time to invest in smaller NBFCs than in larger ones for healthier returns?

Smaller NBFCs can offer higher return potential than larger ones in this phase of the cycle, but the opportunity is far more selective than broad-based. Many smaller and mid-sized NBFCs are coming off a low base, operate in niche segments like MSME or small-ticket LAP, and can grow assets and earnings faster as funding costs ease and operating leverage kicks in. This is where healthy returns can be generated, especially when valuations still assume elevated risk and modest profitability. However, the dispersion within this bucket is wide execution quality, underwriting discipline, and management depth matter far more than size.

At the same time, the risk profile in smaller NBFCs is clearly higher. Ground-level evidence points to rising competition and risk-taking in segments like micro-LAP, along with higher employee attrition and early signs of stress in non-prime portfolios. Credit costs are likely to stay elevated in the near term, and weaker players may struggle as growth slows and asset quality normalises. Larger NBFCs, while offering lower upside, provide greater balance-sheet resilience, funding stability, and predictability of returns, but many already trade at valuations that discount these strengths.

In this environment, smaller NBFCs make sense only with strong selectivity where there is clear visibility on asset quality control, funding access, and a path to sustainable return ratios. It is not a blanket “small over large” call, but a case for focused exposure to well-run smaller franchises where growth and valuation asymmetry still exist, while avoiding those where growth is being chased at the cost of credit discipline.

Do you think GST rate cuts could be a pivot point for earnings growth from Q3 onwards?

GST rate cuts can act as a meaningful pivot point for earnings growth from Q3 onwards, though the impact is more sequential and structural. Historical evidence shows that GST rate rationalisation typically leads to a short-term adjustment phase, followed by stronger and more durable revenue growth as lower rates improve compliance, expand the tax base, and revive demand. Past episodes suggest an initial dip of around 3–4% in collections, but this is usually followed by sustained month-on-month growth of 5–6%, indicating that volume and compliance effects more than offset the rate reduction over time.

From a corporate earnings perspective, the transmission works through improved consumption, better pricing power in discretionary segments, and operating leverage kicking in as volumes recover. Lower GST rates also ease working-capital pressure and reduce compliance frictions, supporting margins rather than compressing them. Importantly, the fiscal framework cushions any revenue volatility for states, allowing policy continuity without tightening elsewhere in the economy, which reinforces the growth impulse.

Q3 should mark the beginning of an earnings inflection, with the more visible and broad-based impact emerging into Q4 and beyond as demand normalises and volume-led growth feeds into profits. In that sense, GST cuts are less a short-term stimulus and more a catalyst for a healthier, earnings-driven recovery cycle.