Daily Voice: Right Horizons PMS’ Anil Rego sees improving risk–reward in largecap autos, mixed outlook for IT sector

While pharmaceuticals may be excluded from direct US tariffs for now, it would be premature to assume the sector faces no risks. Indian pharma exports are vital for lowering US healthcare costs, but regulators remain cautious about dependence on imports. Initiatives like SAPIR highlight the US intent to reduce reliance on foreign APIs and intermediates, which could erode India’s cost advantage if tariffs or restrictions are applied upstream.

Beyond tariffs, risks stem from regulatory frameworks such as MFN provisions, biosecurity acts, and stockpiling mandates, which may increase compliance costs or slow approvals. Meanwhile, pricing pressure in the US generics market continues, with sustained erosion outside limited-capacity niches like injectables and complex generics.

Importantly, pharma could still be used as a bargaining lever in broader trade negotiations, exposing it to potential non-tariff barriers like tighter inspections or supply chain restrictions. That said, sector resilience is supported by diversification into complex generics, biosimilars, GLP-1 therapies, CDMO opportunities, and domestic branded formulations. Strong demand in chronic care, obesity and diabetes treatments, alongside CDMO investments, should help mitigate external risks and sustain long-term growth.

Which segment within the banking and financial services space do you find most attractive right now?

PSBs continue to gain market share in advances led by strong traction in home loans, auto loans, MSME, and gold loans. Their margins remain resilient, aided by deposit repricing and liquidity support, positioning leaders to sustain growth momentum.

On the private side, near-term headwinds from margin compression and muted credit demand persist, yet select names stand out due to their strong liability franchises, improving CASA mix, and structural RoA/RoE levers.

Among mid-sized players, stable margins and management-driven turnaround strategies are favoured. Small finance banks also offer high growth opportunities from financial inclusion and retail expansion, though investors must weigh these against rising credit costs in small-ticket retail and MFI segments.

In essence, PSBs provide cyclical growth leadership, select private banks deliver stability and efficiency gains, while SFBs offer long-term niche growth.

Does the IT sector appear attractive from a risk-reward perspective over the next 18 months?

From a risk–reward perspective, the IT sector presents mixed but selective opportunities. Large, diversified players are expected to deliver modest single-digit revenue growth, with margins stabilizing but remaining below historical peaks due to wage pressures, slower renewals, and pricing resets. This provides defensiveness, though near-term upside appears capped.

In contrast, mid-tier firms and specialized engineering and R&D service providers offer stronger growth visibility, supported by demand for next-generation technologies such as cloud, AI, electrification, and software-defined platforms. These segments are expected to sustain double-digit growth rates, with opportunities for margin expansion as scale and domain expertise deepen.

The broader industry backdrop is gradually improving, with discretionary tech spending and digital transformation demand likely to revive in the second half of FY26. Overall, while the sector may not see a broad-based re-rating, selective exposure to growth-focused niches combined with the stability of larger players offers a more balanced risk–reward opportunity compared to a year ago.

Have you increased your weightage to the auto sector in light of the recent GST rationalisation?

We have selectively increased weightage to the auto sector in the large-cap category. The recent reforms are expected to reduce rates on high-ticket discretionary items such as passenger vehicles and two-wheelers, moving them from the 28% slab to 18% in many cases. This tax relief, coupled with the festive-season demand uplift, provides a strong consumption catalyst, especially in urban markets where affordability and sentiment are key drivers.

The GST cut acts as an indirect income booster for households, and the multiplier effect on GDP is estimated at 20–50bps, which should sustain higher volumes for the sector. While near-term channel inventory may delay the full benefit reaching end-consumers immediately, the medium-term outlook remains positive as lower effective taxation improves affordability and demand elasticity.

Against this backdrop, we see the risk–reward in large-cap autos improving and have accordingly raised exposure in that segment to capture the structural and cyclical tailwinds emerging from the reforms.

Do you expect the RBI to cut rates in the last quarter of 2025 to counter the potential drag from tariffs?

The RBI’s decision in the last quarter of 2025 will likely be influenced by how tariffs and GST reforms together shape growth, inflation, and liquidity conditions. On one hand, the recent tariff hikes pose downside risks to growth, particularly through weaker exports and potential disruptions to capital flows, which could justify an accommodative stance. On the other hand, GST rate rationalisation acts as a counterbalance, boosting disposable income and consumption, with estimates suggesting a 20–50bps lift to GDP if rate cuts are fully passed on.

From a monetary policy perspective, the RBI has already shifted to an easing cycle earlier in FY26, citing restrictive real rates and softening inflation momentum. With CPI inflation trending lower, helped by tax cuts on discretionary goods and moderating food prices, the central bank has more room to support growth if external shocks from tariffs prove protracted. However, fiscal constraints remain important: if GST cuts widen deficits and crowd out public capex, monetary easing might be sequenced cautiously to avoid stoking macro instability.

Do you think the equity market is waiting for the actual implementation of GST cuts before reacting?

The market seems to be in a “wait-and-watch” mode, looking for clarity on the actual timing and scope of GST rate cuts before fully pricing in the upside. While the announcement has improved sentiment, investors remain cautious because past reform rollouts have often been staggered and selective. The proposed changes—such as reducing rates on autos, durables, and consumer goods from the 28% slab to 18%—could provide a direct boost to consumption, but the benefit will only be visible once companies pass through lower taxes to end-prices and volumes respond.

In the meantime, markets are balancing the benefits of demand stimulus with concerns about fiscal trade-offs, as GST cuts imply revenue losses that may constrain government spending on infrastructure or social schemes. This creates an element of uncertainty around the net macro impact. Moreover, foreign flows have been volatile amid trade tensions and tariffs, keeping broader market moves muted despite domestic reforms.

In essence, while GST rationalisation is a structural positive, sectors such as autos, cement, and consumer durables are likely to benefit. However, the equity market appears to be waiting for actual implementation, clarity on pass-through, and early consumption data before re-rating these themes more decisively.

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