Anil Rego of Right Horizons
The overall corporate earnings growth looks muted so far but banking and automobile look upbeat, according to Anil Rego of Right Horizons PMS.
The banking space reported strong topline growth because of healthy disbursements and higher loan rates and robust earnings growth on the back of good growth in advances, lower provisioning for loans, and expanding net interest margins (NIMs).
The founder and fund manager at Right Horizons is a pioneer in the contrarian style of investing and a seasoned investor for over three decades. Earnings growth is expected to be better in the second half of this year mainly due to softening of industrial commodities and destocking witnessed in Q1 eases and realisations improve, he says in an interview with Moneycontrol. Excerpts from the discussion:
Why is the special RBI meeting essential to look at?
Six years ago, the monetary policy framework mandated the RBI to maintain retail inflation at 4 percent with a margin of (+ or -) 2 percent.
Though the RBI has been aggressively raising the key interest rate taking the repo rate to 5.9 percent, it has failed to contain the inflation within the target for three consecutive quarters therefore required to submit a report to the government for the reasons for failure and action to be taken to bring down inflation within the target range.
Do you think the equity market is less bothered about inflation, global slowdown fears, and geopolitical tensions now?
Equity markets have priced in the high inflation, global slowdown fears, and geopolitical tensions and are trading rangebound, unless there are unexpected shocks to the market it will follow the trajectory of future corporate earnings growth.
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How do you see the corporate earnings and management commentaries? Do you see better earnings in the second half of FY23?
The overall earnings growth for India Inc might be muted but we are bullish on the banking and auto space and have seen that the banking space reports strong topline growth due to healthy disbursements and higher loan rates and robust earnings growth on the back of good growth in advances, lower provisioning for loans, and expanding net interest margins (NIMs).
The auto sector saw both cars and two-wheelers manufacturers post better volumes, improving the operating margins and that was further aided by lower raw material costs, better supply of chips and higher average selling price.
Earnings growth is expected to be better in H2FY23 than H1FY23 mainly on account of softening of industrial commodities and the destocking witnessed in Q1 eases and realizations improve.
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Do you still expect the economy to grow higher than what various agencies have estimated and the RBI forecast for the current year and next year?
The Indian economy even at the projections of agencies and RBI forecast is still the highest among the major economies is expected to overtake Japan (approximately $ 5 trillion GDP) and become the third-largest economy by FY27.
The reason behind this constructive outlook on India is due to its structural story intact since the policymakers have taken a series of reforms over the past few years with a focus towards lifting the productive capacity of the economy and the spread of the banking network has improved the mobilization of financial resources in the economy.
Should one start accumulating pharma space?
Industry estimates suggest that global pharma companies outsourced 42 percent of their R&D and manufacturing operations in 2020, and the proportion continues to grow.
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Contract research and manufacturing can remain a long-term secular growth opportunity for India since the sharp rise in global demand in this space for Indian players is positive. Given the valuations and base effect of FY22, we are positive on specific names in the sector.
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