Earnings growth might pick up only in FY19: A K Sridhar of IndiaFirst Life

He says IT and engineering stocks are trading at reasonable valuations

While most of the market is in a fully-valued zone, information technology (IT) and engineering stocks are trading at reasonable valuations, observes A K Sridhar, chief information officer (CIO), IndiaFirst Life Insurance. In an interview with Ashley Coutinho, Sridhar says earnings growth might pick up only in FY19. Edited excerpts:

How will GST (goods and services tax) impact the equity market in the coming months?

GST will benefit in terms of avoiding underreporting of sales by traders, tax adherence and tax collection. Overall, it will improve the government’s revenue. Having said that, it may bring more volatility into markets, especially in the first two-quarters after the implementation because of lack of clarity on the final impact on products and services. Things will get much clearer in the subsequent six months.

What are your key takeaways from the March quarter earnings?

As expected, the growth numbers — both top line as well bottom line — were not encouraging. Industrial activity is yet to pick up. The valuations are stretched and not cheap any longer. In fact, corporate earnings in the last six to seven quarters have been average and below analysts’ expectations. We expect the earnings in FY18 to be muted and do not see a huge upside for the next three-quarters. However, things are expected to turn around in FY19. For this year, the government spending is going to be the key driver. 

Does the market look overvalued? 

While most of the sectors and stocks are in a fully valued zone, IT and engineering stocks are beaten down at decent valuations. Sectors like auto will continue to deliver good results. At present, the choices are limited but not completely absent. If the liquidity stays at the present level, there may not be any downside. 

Are insurers buying into equities? 

Most insurance companies are getting good inflows and are investing in equity markets. Ninety per cent to 92 per cent of our equity funds is invested in the market. Most of the other insurance companies also have enough liquidity to deploy in the equity markets. In case of any downward correction, we are in a much comfortable space having sufficient liquidity, to buy more of equity. Having said that, we cannot deny that market valuations are not cheap and one has to cautiously identify the theme and the stock at present market valuations. 

Which sectors are you betting on? 
We expect the auto and FMCG (fast-moving consumer goods) sectors to continue doing well, in spite of uncertainties around GST. In addition, We expect some turnaround in certain sectors like IT, pharma & engineering, which have been punished more than what they deserve. We are also closely watching the construction- and the housing space on the back of certain policy announcements and the government spending.