Daily Voice: No rate cut before second half of FY25, says Anil Rego

With earnings season round the corner, Anil Rego, founder and fund manager, Right Horizons, expects the momentum to continue and foresees more upgrades than downgrades in FY25.

Indian corporates have managed to hold on their own despite challenges such as increased borrowing costs and supply disruptions and should be able to sustain the momentum, Rego, who has been an investor for over three decades, said.

In an interview to Moneycontrol, Rego said he expects the focus on the infrastructure to continue and advises caution on small and midcap stocks, saying valuations have run ahead of fundamentals. Edited excerpts:

Do you think the RBI, which begins its bi-monthly policy review on April 3, will offer clues to the timing of interest rate cuts when it shares the outcome on April 5?

At its last meeting, the RBI maintained the benchmark interest rate at 6.5 percent, marking the sixth consecutive meeting without a change. This decision was made due to inflation concerns. The Monetary Policy Committee (MPC) also reiterated its focus to concentrate on gradually withdrawing accommodation to bring inflation within the target range while still supporting economic growth.

There is an expectation that there won't be a rate cut in the upcoming MPC meeting. Presently, food prices primarily influence inflation, as fuel prices remain moderate. We anticipate the possibility of rate cuts only at the beginning of H2 FY25.

Is it time to have more exposure to real estate and metal stocks?

Realty and metal have been among the best-performing sectors in FY24. However, we have a neutral view of both sectors.

Do you expect the earnings upgrade to outpace downgrades?

India is benefiting from tailwinds with healthy GDP growth, moderating inflation, rangebound oil prices, expected rate cuts, and resilient corporate earnings. The corporate earnings for the third quarter of fiscal year 2024 ended on a positive note, characterised by widespread outperformance, driven by margin tailwinds. BFSI and automobile continued to drive the incremental overall performance. However, metals and oil & gas sectors reported healthy earnings growth, providing further support to overall earnings.

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Corporate performance in 9M FY24 continued the momentum, with upgrades significantly outnumbering downgrades. The robust performance can be attributed to several factors including strong revenue growth driven by increased demand. Additionally, the introduction of new products or facilities contributed to this growth.

Factors such as domestic consumption, demand across various sectors and the government expenditure on public infrastructure aided the growth. In H2 FY24, India's corporate sector maintained a trend of more upgrades than downgrades despite facing challenges such as increased borrowing costs and supply disruptions. We expect the momentum of earnings to continue in FY25.

Will PSUs and infrastructure stocks carry forward the momentum into FY25? What are your expectations from them on the earnings front?

PSU stocks have witnessed a remarkable rally over the past year, driven by increasing order books in sectors such as railways and energy, while the uptick in PSU banks has been attributed to improved balance sheets and healthy loan growth. We believe the euphoria surrounding these stocks has led to price surpassing their fundamentals. Selective fundamentally strong companies are likely to do better.

We expect the focus on the infra theme to continue with the government's capital expenditure initiatives, which are likely to have a multiplier effect, driving growth in infrastructure and related sectors. Furthermore, the prudent funding of capital expenditures is anticipated to sustain healthy balance sheets, thereby supporting the outlook for healthy earnings.

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How is the chemical space looking from investment point of view?

The chemical sector has been under pressure and facing challenges, primarily due to headwinds in global markets where numerous global agrochemical companies have begun destocking. Many domestic chemical players have also experienced margin pressures over the last year.

Our assessment of the sector is neutral but we anticipate a gradual recovery starting from the fourth quarter. Despite the current difficulties, there are growth opportunities for Indian chemical manufacturers stemming from factors such as domestic demand and global trends like the "China plus one" strategy, Europe's energy crisis led to "Europe plus one".

Will the rally in mid and smallcaps continue in FY25 despite elevated valuations?

We expect the volatility in small and midcaps segment to continue in the near term and recommend limiting exposure to quality names available at reasonable prices with consistent healthy earnings growth.

We expect the quality names to recover faster during the volatile phase. The segment offers high returns but comes with increased volatility. We expect selective names with a strong order book, superior earnings growth and healthy return metrics and a sustainable business model to be good opportunities.

We prefer companies that are available at a reasonable discount to value, with clear signs of profitability and are gaining market share from the competition. If the growth momentum in earnings is sustainable for the longer term, then investors may continue to hold the investments despite the rally.

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