'Promoters with fire build the next large caps'

Summary: With valuations in mid and small caps still elevated, what should investors expect next? In this deep-dive conversation, a seasoned fund manager shares why earnings risk is always present but manageable over longer horizons. He breaks down how stock selection, promoter quality, sector rotation and portfolio balance helped turn around fund performance. And why chasing optical cheapness can be misleading in a growth market like India. In a market where mid- and small-cap valuations still look stretched, many investors are asking: Will earnings growth keep pace? For Aditya Khemani, Fund Manager at Invesco Mutual Fund, the answer depends on how you look at time. Earnings risk, he says, never goes away. But over a three-, five- or 10-year horizon, it matters far less. With over 19 years in the market and Rs 25,000 crore spread across five funds under his watch, Khemani prefers to look beyond quarterly noise. His lens: quality businesses, cash-flow strength and promoters with the drive to scale. In this conversation, he explains why patience matters, how balance has helped his funds recover and what investors should watch in today’s crowded mid- and small-cap space. Mid and small-cap valuations still look elevated despite the recent run-up. Do you think earnings growth can keep pace, or are we staring at the risk of disappointment? When we talk about equities, earnings risk will always be there. There’s no way to run away from it. In good markets or bad, in strong economies or weak ones, earnings risk is something investors must take in their stride. The key point is the investment horizon. Whether you’re looking at six months, a year, or five years makes a big difference. For instance, if you entered the market five or 10 years ago, it wouldn’t have mattered which quarter earnings risk showed up; it wouldn’t have significantly affected your long-term returns. But if you entered just two or three quarters ago, then an earnings disappointment would have mattered more. So yes, earnings risk is always present, even now. But the moment you start thinking in terms of the next three, five, or 10 years, things become much clearer from that perspective. If we look at the mid-cap and small-cap segments, do you think earnings growth in this space can justify current valuations, or are we in a zone of excess optimism? Valuation is always a very subjective matter. Most people look at it simplistically, say the FY26 or FY27 P/E ratio and conclude that a stock is expensive. But that approach can be misleading. India is viewed as a growth market by both foreign and domestic investors, and in growth stocks, 60–70 per cent (or even more) of the value comes from the terminal value, earnings that accrue beyond the next 10 years. So, just looking at the next one or two years’ P/E multiples is too narrow an exercise. On an aggregate basis, I would say the market might be 20–25 per cent expensive. But if you’re backing a company that can grow earnings at 20 per cent or more over a long period, that premium doesn’t really distort returns much. For example, if earnings grow at 20 per cent CAGR over the next decade and you buy the stock 20–25 per cent expensive, your compounding could still be 17–18 per cent CAGR, quite close to the ear