Nippon India’s Sailesh Raj Bhan Advocates Domestic Investments Amid US Tariff Uncertainty

Global Trade Disruptions Pose Risks for Export-Driven Companies

Sailesh Raj Bhan, CIO of Nippon India Mutual Fund, has advised investors to focus on domestically driven businesses as rising US tariffs and global trade disruptions introduce uncertainty for export-dependent firms. He highlighted that while India may not be directly impacted by US tariffs, Indian exporters supplying to Europe and other affected regions could still face revenue pressures.

“Even if India isn’t directly impacted, higher tariffs on Europe could hurt Indian exporters. If 50% of a company’s business is export-dependent and sees a 10-15% tariff impact, the earnings hit will not be insignificant.”

Bhan also warned that global supply chains will undergo major shifts, potentially leading to second-order effects that could further pressure earnings in key export-driven sectors.

Earnings Outlook: Growth to Align with Nominal GDP Expansion

Stabilization Expected After Recent Margin Pressures

Bhan projects corporate earnings to grow at 10-12% in the next two years, in line with nominal GDP expansion, barring any major global shocks. He explained that profitability as a percentage of GDP remains high at 5-5.5%, though past earnings growth driven by margin expansion has now reversed.

“Margin expansion that supported past earnings growth has reversed, leading to earnings disappointments this fiscal. However, going forward, earnings will stabilize and align with nominal growth.”

Despite challenges, he believes the worst of the earnings slowdown is now over, pointing out that revenue growth for FY24 was 8-10%, while operating profit grew by 25%.

“Without 10-12% revenue growth, operating leverage disappears, making it hard for earnings to grow at 12-13%.”

Market Disruptions & Sectoral Challenges in FY24

Economic Uncertainty Weighs on Key Sectors

The slowdown in earnings was compounded by several macroeconomic and industry-specific disruptions:

• Post-pandemic policy changes and the withdrawal of government support

• Election-related uncertainty affecting investment cycles

• Extreme weather conditions impacting consumption and supply chains

• Weak global exports, affecting industries like auto and chemicals

“Top 500 companies saw revenue growth in single digits this fiscal due to these factors. Even large sectors like paints and passenger vehicles experienced weak volume growth, while FMCG volume growth has remained stagnant at 2-3%.”

Recent Tax Cuts Provide Relief, Domestic-Focused Companies to Benefit

Bhan sees recent corporate tax reductions as a “huge help” that will improve profitability and support a stronger earnings recovery. He reiterated that investors should prioritize companies with strong domestic exposure, as these businesses are better positioned to weather global trade uncertainties and capitalize on India’s economic growth.

“This phase of disruption is now over. Investors should focus on domestically driven businesses to navigate the evolving macro environment.”