Anil Rego of Right Horizons
“In the IT space, largecaps have corrected close to 20 percent and the midcaps close to 30 percent due to margin contractions in the last few quarters on high attrition, but demand continues to be robust while some slowdown is expected in the medium term,” Anil Rego, founder and fund manager of Right Horizons PMS said in an interview to Moneycontrol.
Right Horizons is bullish about quality names on a longer-term horizon beyond four to five years as they are available at attractive valuations.
On Life Insurance Corporation (LIC) which saw a tepid listing, he said: “Sales of newer policies are lower, pay-outs are increasing, less people are paying premiums for the policies purchased and metrics like VNB (value of new business) margin are one-third of the industry.” Hence, Rego said it is better to avoid LIC unless VNB margins and other metrics improve.
Do you think the market has discounted all negatives?
Markets are sort of leading indicators, pricing in information. While we are in times of uncertainty it is the unexpected that has led to sharp downmoves recently and expected factors have been priced in making the markets reasonably valued; historically when Nifty PE trades below 20 we have seen decent returns in the following years.
It is difficult to predict the short term so any sharp upmoves depend on the type of information that may come in but the fact of the matter is commodity cost pressure is impacting interest rates and profitability of companies although the cause for concern is the same across the globe and as such is priced in. But what is different for India is we are in a position that is fundamentally sound compared to peers because of deglobalisation after the pandemic and the underlying policies that have been and are tailwinds for growth.
We recommend not to rush into deploying cash all at once because markets may become even more attractive, but experience has taught us never to time the market. So one can look to exploit opportunities with a gradual approach over the next few months.
Are you bullish on telecom, which is largely a two player market now?
In a recent interview, Bharti Airtel CEO Gopal Vittal mentioned that the firm is likely to push through a tariff hike in 2022, with expectations of increasing ARPU (average revenue per user) to Rs 200; the subscriber addition may remain muted depending on whether the market is ready to absorb this hike, but revenues may increase sequentially.
In a price-sensitive sector, one needs to track the players very closely and see how subscriber additions and absorption of such hikes play out to take a long-term call. If Jio were to go public the telecom sector may be in for a re-rating.
Is it the right time to bet on IT services?
In the IT space, largecaps have corrected close to 20 percent and midcaps close to 30 percent due to margin contractions in the last few quarters on high attrition but demand continues to be robust while some slowdown is expected in the medium term.
We are bullish about quality names on a longer-term horizon beyond four to five years as they are available at attractive valuations.
Should one start taking exposure to auto space or wait for the situation to improve?
It is the supply side issues that are the headwinds, demand is not an issue any more; it was the inability to service the demand that has been a major issue. However, with the expectation of improvement in the supply chain, steel prices cooling down and debottlenecking being exercised, companies have announced higher capex plans for FY23.
Tata Motors for example has raised capex by 30 percent to Rs 32,000 crore in FY23 hoping to extend a strong recovery and is sitting on a record booking of over 2.5 lakh units or Rs 1.1 lakh crore of business, which needs to be delivered in six to nine months. Jaguar Land Rover is sitting on its highest ever booking of 1.68 lakh units whereas the passenger vehicle business is a little over 75,000 units to 1 lakh.
Considering the demand outlook, product launches, and attractive valuations, we are positive on Tata Motors and Ashok Leyland in the commercial vehicle space, and among ancillaries we prefer Sona BLW Precision Forgings.
What is your take on LIC that has seen a tepid listing?
When it comes to LIC it is not necessarily the pricing or the industry that is the issue; sales of newer policies are lower, pay-outs are increasing, less people are paying premiums for the policies purchased and metrics like VNB (value of new business) margin are one-third of the industry. As things stand now it is better to avoid LIC; one may consider taking a stance if there’s an improvement in VNB margins and other metrics.
BSE IPO index fell more than 30 percent in the last six months. What are your thoughts on the Indian IPO market that has seen several listings since last year, but around 40 percent of them are way below their issue prices including new age companies?.
The number of listings will always be the highest in the years when markets are in a bull run due to the euphoria as investors look forward to listing gains without considering the underlying businesses. India witnessed a high number of listings from various new-age technology-driven and emerging sectors in 2021. However, as the market enters a sense of fear, stocks with no clear view of profitability will be discarded and discounted and that is what was witnessed in the last few months.
What are your thoughts on eMudhra and Aether Industries IPOs? Do you expect muted listing for Delhivery and Venus Pipes?
We have always been of the view to pick companies with strong fundamentals because such firms are resilient and thrive; this has been proven more so in the last two years than ever and as such we never look at investment for the sake of listing gains.
Any business available at premiums should be avoided especially in the present market scenario.
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