Anil Rego of Right Horizons
Whenever the Nifty price-to-earnings (P/E) ratio has gone below 20, it yielded higher returns in the following three years. The probability is higher this time around, thanks to sound policies nurturing economic growth, according to Anil Rego, Founder and Fund Manager at Right Horizons PMS.
After major correction, he believes, quality names whose earnings are resilient are expected to create wealth and additionally so with the recent corrections.
During an interview with Moneycontrol, Rego shares names of some stocks that are expected to double the earnings over the next three to four years and are available at a discount to industry valuation. These include Apollo Pipes, KEI Industries, Tarsons Products and Sirca Paints. Excerpts from the discussion:
Do you think risk-reward in the market has improved after the recent sharp correction? And, are we near the bottom now?
We have noticed that Nifty P/E (price to earnings) when it has fallen below levels of 20 in the past has given, higher returns in the following three years, and the probability of which is higher on the back of sound policies nurturing the growth of the economy.
We do not time the market but the dips can be looked at as an opportunity to buy stocks with strong fundamentals in a staggered manner.
What are your thoughts on the recent FOMC meet and its action?
The inflation coming in at multi-year highs, 8.6 percent in May for the US, the FED had to take an aggressive stance and hiked rates by 0.75 percent, most since 1994 and we expect the hikes to be steeper if inflation runs high.
There could be a possible 50 bps hike next month and we can see Fed Rate around 3.4 percent at this year-end. Further rate hikes would bring volatility to the market however large hikes could curtail inflation much faster.
We have seen a significant correction in growth stocks. What is your take on investment opportunities available in growth stocks?
High-growth stocks are expensive relatively to others in terms of relative pricing ratios such as price-to-earnings, and price-to-free-cash-flow ratios. Despite the premiums, quality growth stocks can deliver multibagger returns.
The constraints faced by some of the companies at present have been accounted for and earnings have been lowered but quality names whose earnings are resilient are expected to create wealth and additionally so with the recent corrections.
We favour names like Apollo Pipes, KEI Industries, Tarsons Products, Sirca Paints, etc. which are expected to double earnings over the next three to four years and are available at a valuation which is at a discount to industry valuation.
Do you think the consumer space is quite expensive now due to rising commodity prices and pressure on low household incomes due to rising inflation?
The elevated cost of finished goods has led to demand slowdown in white-goods and discretionary demand, however, strong monsoon and sequentially softening raw material prices will boost consumption of discretionary goods from Q3FY23 onwards. While downtrading is expected to an extent the consumer space is poised to do well.
Even after a sharp run-up in the power sector, do you think there is still more room for a run-up in the sector?
The renewable industry is expected to grow 4X in size by 2030 to 450-500 GW. We prefer solar on the renewables side and would like to wait for further valuation cool down in fossil fuel-based power companies.
Do you expect double-digit credit growth this financial year despite the current weak macro-environment?
We expect retail and MSME to be prime drivers of credit growth in coming quarters. Urban credit is already in double digits, going forward normal monsoon will drive improved credit growth for rural areas as well. There is no slowdown in both Government and private side CAPEX which is of long-term nature which will support credit growth in a weak macro-environment. Going forward recovery in economic activity, the second-tier effect of an increased level of CAPEX investments and demand revival will lead to lower teens kind of credit growth over the next two to three years.
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