Earnings recovery not seen before Q1 of FY18: Invesco MF

Himadri BuchMoneycontrolThe cash crunch has postponed the recovery in earnings from FY17 to the first quarter of FY18 as the uncertainty is likely to cloud the domestic prospects in the near-term, says Vinay Paharia, Equity Fund Manager at Invesco Mutual Fund.

In an interview to Moneycontrol, Paharia said that the earnings for the last two quarters of this financial year -- for October-December and January-March -- are likely to remain volatile. “We were expecting recovery in FY17 which has been postponed by the events which have happened in calendar year 2016. We expect earnings for Q3 and Q4 to be fairly volatile and uncertain; so, definite trends would start emerging from the first quarter of FY18 onwards,” Paharia said.

At Invesco MF, Paharia manages Rs 1,031 crore across four equity schemes —Invesco India Tax Plan, Invesco India Mid Cap Fund, Invesco India Mid N Small Cap Fund and Invesco India Business Leaders Fund.

Paharia envisages market performance to be driven mainly by earnings growth rather than re-rating adding that the last 6-8 valuations of most sectors have undergone a meaningful correction.

“As per our internal estimates, markets are trading at premium of 18 percent average over long period average down from 28 percent premium about 5 months ago,” said Paharia.

He also added that underlying earnings remain subdued as of now.

However, he expects macro recovery to happen on the back of levers such as potential improvement in capacity utilization, spends towards infrastructure and improvement in investment demand.

According to Paharia, barring poor investment demand, consumption and government expenditure have continued to remain steady over the last 6-7 years.

Paharia explains investment demand as a 'derived demand' for capital goods —demand for infrastructure.

“When entrepreneurs believe that addition of capacity can be quickly utilized by the economy, they will start to put up more factories; they would set up infrastructure which is what we call investment demand,” he said.

Going forward, Invesco MF would closely watch trends/indicators related to investment demand. “From 2011 to 2016 we have seen a sharp deceleration in investment demand and that has caused a slowdown in the Indian economy,” Paharia said.

Expecting that the earnings growth will be stronger in the medium term, the fund house has been betting big on cyclical sectors particularly financials, consumer discretionary and industrial sectors. The fund house finds companies in the financials and consumer discretionary space to be reasonably valued compared to industrials.

Currently, purely because of valuation, Invesco MF is avoiding consumer staples and to some extent healthcare companies, but the fund house is turning incrementally positive on IT, says Paharia.

Among financials, the fund house has exposure to both banks and non-banking financial companies or NBFCs. The fund house’s portfolio is largely inclined towards private sector companies “We have most of our exposures towards companies which are well managed and with a strong balance sheet; [they] generate superior returns on equity and have more sustainable models of growth. These characteristics are mainly satisfied by companies in the private sector which are reasonably valued currently,” explains Paharia.

When asked about incremental positive exposure to IT companies, Paharia said, ”Over a period of time, IT companies will be able to adapt to the structural headwinds which they are facing currently.”

He is hopeful that cyclical headwinds will be subside as the underlying macro environment of customers start improving.

The IT industry has been going through a rough time since the last one year. The BSE IT index continues to underperform when compared to the Sensex on a six-months and one-year basis on the back of the headwinds that the industry faces from muted global macro economic environment, Brexit and the transition of existing business to new technologies.

The fund house has been receiving steady inflows in its schemes and may look to launch a retirement fund once it receives approval from the Securities and Exchange Board of India.