Anil Rego, founder and fund manager at Right Horizons, remains confident in India’s ongoing bull rally, attributing it to strong structural growth drivers. In an interview with Moneycontrol, Rego highlighted that Foreign Institutional Investor (FII) ownership of Indian equities is currently at decade-long lows, leaving them with limited influence on the domestic market.
While he anticipates some moderation in earnings that could spark short-term volatility, Rego emphasized that India's economic landscape remains stable, especially in contrast to the volatile global environment.
With over three decades of investment experience and a history of contrarian bets, Rego holds a neutral stance on the auto sector. Despite the festive season, auto dealers are reporting sluggish sales and weak market sentiment, pointing to potentially flat growth in Q2FY25. Notably, the Nifty Auto index saw a 7 percent rise in the September 2024 quarter, compared to an 18 percent surge in the previous June quarter.
Have you changed your bets after the recent correction in the market from its all-time high?
We are capitalising on the recent market correction by investing further in high-quality names already in our portfolio. Our focus remains on companies with strong fundamentals, which have demonstrated sharp recoveries in the past. This strategy positions us well for potential gains as market conditions improve.
Do you see more headwinds than tailwinds for the equity markets in the short to medium term, which could keep the market consolidative?
China's central bank has reduced its short-term policy rate (reserve ratio for banks) by 50 bps, mortgage rate for existing housing by 50 bps to boost consumption demand and injected additional liquidity into the financial system in its ongoing attempts to stimulate the economy. Additionally, the lower valuations fostered a renewed sense of optimism in a market that had been underperforming for an extended period aiding the momentum. A part of the funds that previously exited Chinese equities in favour of Japanese and Southeast Asian equities are expected to reverse following Beijing's stimulus measures.
While FIIs offloaded domestic equities during the week it is unlikely to impact the Indian market significantly. India’s economic landscape continues to be stable against the backdrop of a volatile global economy. India’s bull rally is being driven by structural growth drivers that remain intact. Moreover, FII ownership of Indian equities is at decadal lows, thus have limited room to impact domestic market. We expect the market momentum to continue however some bit of moderation in earnings is anticipated which is likely to induce near term volatility.
Do you think a repo rate cut is only possible in February and not this year, after considering the RBI's commentary?
Inflation increased to 3.65 percent in August 2024 from an upwardly revised 3.6 percent in July. The wholesale prices increased by 1.31 percent YoY in August 2024, easing from 2.04 percent in July. While core inflation has stayed relatively stable, rising food prices have kept the headline figures elevated.
RBI has maintained its status quo on policy interest rates and has changed the stance to 'neutral' from 'withdrawal of accommodation'. Though inflation has stayed below 4 percent for the past two months, risk of rising food prices is high. We anticipate if food inflation moderates, we could expect a modest rate cut in subsequent policy meetings during this fiscal year.
Has the risk-reward balance turned favourable in the IT sector?
The Q2FY25 could be a mixed bag for IT companies. Largecap IT services companies are expected to grow in range of 0.5-3.5 percent and mid-cap companies to grow by 2-4.8 percent, driven by increased financial services spending, ramp-up of cost takeout deals & lower spending cut in existing programs. However, the retail segment is likely to underperform in Q2, potentially causing divergence in overall performance. Deal execution may increase in the second quarter, as it is seasonally a strong quarter for IT companies.
The 50bps rate cut announced by the Fed in September 2024 has raised market expectations for a strong recovery in the sector. However, we expect clarity on client spending behaviour, after the third quarter, once budgets for CY25 are finalised (factoring in the impact of rate cuts and US election results).
Tier-I companies are projected to report 0.5-3.5 percent sequential growth in USD revenues. Meanwhile, EBIT margins are expected to stay mostly stable, with a slight upward trend due to productivity improvements. We are monitoring 1) Ramp up of large deals; 2) Trend in discretionary spends; 3) Commentary on deal pipeline & its conversion.
Which sectors are likely to drive earnings growth in the September quarter?
The earnings slowdown observed in Q1FY25 is expected to continue into Q2FY25E. Year-over-year margin benefits are anticipated to diminish, leading to likely dip in profit growth. Sectors like autos, commodities, and industrials are likely to see a decline in profits, while earnings in IT, chemicals, and banking are projected to pick up pace.
Does the auto and auto ancillary sector appear overvalued?
The auto industry has encountered difficulties in recent quarters, such as inventory build-up, supply chain issues, and shifts in market demand. In Q2FY25, reduced consumer demand has affected overall sales, potentially leading to a decline in retail across various segments. Despite the festival season, auto dealers are reporting stagnant performance and weak market sentiment, indicating possible flat growth. We are neutral on the sector and believe only specific names to do better.
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