Daily Voice: Right Horizons' Anil Rego expects consumer discretionary sector to do better in Q3

The revenue growth in Q2FY25 were largely in line with expectations. Overall, IT companies showed a modest improvement in financial performance, driven by the ramp-up in signed deals. The demand environment remained consistent with Q1FY25, as clients continued to exercise caution due to macroeconomic concerns. However, there are some encouraging signs, particularly in the BFSI segment, where clients are increasingly prioritizing high-value IT projects. Deal wins have remained strong across companies, with a noticeable increase in the number of longer-duration contracts.

Revenue growth is expected to remain modest in Q3FY25 due to seasonal factors but should accelerate from Q4FY25, driven by the ramp-up of recently signed deals. Demand for Generative AI-based solutions is anticipated to rise, as these technologies offer substantial productivity benefits for clients across various industries. Additionally, cloud-related projects continue to dominate the deal pipeline. We believe selective opportunities with healthy executable order book in the segment are compelling.

Do you think electronic manufacturing services (EMS) will be one of the strong themes for 2025?

We expect the EMS industry to maintain its strong growth momentum, driven by (1) a large population and rising aspirations, which will ensure significant domestic demand for electronics; (2) low per capita electronics consumption, currently a quarter of the global average; and (3) the government’s efforts to position India as a global hub for electronics manufacturing.

Growth for the industry will be driven by the Government of India’s "Make in India, Make for the World" initiative. This vision is supported by various schemes and incentives that enhance India’s position as an alternative manufacturing hub to China, alongside a significant import substitution opportunity within the country.

Are you bullish on new-age technology stocks for 2025?

Investors have had a history of euphoria with IPOs like the internet companies in 2000, Real estate in 2007 to 2008, Hospitals & Pathology in 2015, microfinance institutions, banks & insurance in 2016-17, the 2021 frenzy of chemicals, pharma and new age businesses is not any different.

We believe in investing in companies with sustainable Business Models with a track record of solid profitability and shareholder-friendly management with execution capability; this helps generate wealth over the long term.

What are the tailwinds and headwinds for the equity markets in 2025? Do you foresee any serious headwinds?

The rally in equities has been vibrant and resilient, fuelled by robust corporate earnings over FY20-FY24. This has been supported by a surge in domestic equity inflows and a resilient macroeconomic environment. However, after four consecutive years of strong double-digit growth, corporate earnings are now entering a phase of moderation, due to pressures from commodities and waning tailwinds.

As we enter 2025, the investment landscape presents a blend of complexity and opportunity. The outlook for the year ahead is shaped by a dynamic blend of factors, including evolving monetary policies, shifting geopolitical tensions, and structural transformations. While these elements present both challenges and potential disruptions, they also create opportunities for growth across the board.

We believe that valuations are ineffective for predicting short-term returns and amidst the backdrop of moderating earnings growth, expensive valuations, and mounting geopolitical headwinds we believe going forward increase in capex, rate cuts by RBI and improving demand will be key drivers.

Do you think the RBI will lower the repo rate below 6% in 2025?

The MPC's decision to maintain rates and stance while reducing the CRR by 50 bps reflects a pragmatic approach. Despite the slowdown in growth during the first half of FY25, the MPC may have chosen to look beyond the data, recognizing that some of the decline in growth momentum was influenced by base effects and other unique factors.

GDP forecast was revised to 6.6% for FY25 versus 7.2% projected earlier, with Q3FY25 now at 6.8% (versus 7.4% earlier), Q4FY25 at 7.2% (versus 7.4% earlier). GDP growth rate for Q1FY26 projected at 6.9% versus (7.3% earlier) and Q2FY26 at 7.3%.

Monetary Policy Committee (MPC) revised the CPI projection to 4.8% for FY25 versus 4.5% projected earlier since inflation increased drastically in September-October driven by an increase in food prices. Challenges arising from geopolitical uncertainties, fluctuations in global commodity prices, and geo-economic fragmentation remain significant risks to the outlook.

We anticipate a potential rate cut in the February 2025 policy meeting. However, risks that could delay this include rising commodity prices, slow and uneven disinflation in food prices, as well as persistent volatility in the forex market.

Do you expect the December quarter earnings season to outperform the September quarter? Which sectors will drive earnings growth in the December quarter?

Following a slow demand environment in the first half, the Jewellery, luggage, footwear, and apparel industries are expected to gain momentum during the marriage and festive season. We expect the consumer discretionary sector to do better in Q3. The trend of rising disposable income, premiumization, and shift from unorganised to organised is expected to drive the overall demand.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.