Nippon India’s Sailesh Raj Bhan: Forgotten Blue Chips to Power Next Market Rally

New Market Leaders to Emerge Over the Next Three to Five Years

The next phase of market winners will differ from the past bull cycle, according to Sailesh Raj Bhan, Chief Investment Officer at Nippon India Mutual Fund. While fresh leadership will emerge, a significant 30-40% of the top-performing stocks are expected to come from power, capital goods, and other order-driven industries, he said. These sectors are currently sensibly valued and projected to deliver 15-20% earnings growth over the coming years.

“Investors with a three-year horizon should see this as a market to accumulate,” Bhan emphasized, urging long-term investors to focus on fundamentally strong businesses poised for sustainable growth.

Momentum Plays: Stick to Market Leaders, Avoid Fragile Bets

Selective Investing in Rebounding Sectors

Momentum-driven sectors that previously corrected and rebounded have seen excessive ownership leading to deep corrections. Bhan’s investment strategy involves owning the industry leaders while avoiding weaker second- and third-tier players that may struggle to sustain their recent uptrends.

“High-quality businesses in industrials—companies generating ₹1,000 crore in operating profit with a ₹10,000 crore market cap—are classified as small caps today, but they are far from fragile,” he pointed out.

Industrials and power utilities, particularly those with 25% earnings growth, remain attractive and could deliver 15% annual returns over the next three years.

Contrarian Bet on Forgotten Blue Chips

Oversold Sectors Poised for a Re-Rating

Bhan is betting on “forgotten blue chips” across sectors like insurance, cement, and consumer stocks—companies with solid fundamentals but depressed valuations.

“Some of these stocks have been in price stagnation for years. With low multiples, their downside is limited, and any earnings surprise could trigger a sharp re-rating,” he explained.

Historically, sustained earnings expansion over three years often leads to multiple re-ratings, making these overlooked stocks a compelling opportunity for contrarian investors.

Consumer Stocks: From Market Darlings to Overlooked Bargains

Once Overpriced, Now Attractive for Long-Term Investors

Consumer sector stocks that once commanded exorbitant valuations of 60-70x earnings have now fallen to 30x FY27 earnings, yet investor sentiment remains weak.

“No one wants them now, but they are still fundamentally strong businesses with capable management and 15-20% earnings growth,” Bhan noted.

While these stocks aren’t at rock-bottom valuations, their lower earnings expectations could lead to positive surprises and stock re-ratings in the near future.

Defence Stocks: Focus on Industry Leaders, Avoid Smaller Players

Caution Advised in the High-Interest Defence Sector

Despite widespread enthusiasm for defence stocks, Bhan remains selective and cautious, warning against investing in smaller companies within the sector.

“There’s too much noise in defence stocks,” he said, highlighting that many smaller defence firms function as subcontractors with thin margins and frequent cost overruns.

While some established defence players may deliver earnings-led returns, smaller stocks face severe de-rating risks if earnings disappoint, Bhan warned. Investors should focus on market leaders rather than taking risks on volatile small-cap players in the sector.

Earnings Growth to Drive Future Market Leaders

Sectors Positioned for Strong Long-Term Gains

The next three to five years will see new sector leaders emerge, with Bhan identifying:

• Industrials and Power Utilities: Poised for 25% earnings growth, offering attractive returns

• Forgotten Blue Chips: Insurance, cement, and consumer stocks with low valuations and potential re-ratings

• Momentum Stocks: Focus on market leaders, avoid overvalued second-tier companies

• Defence Stocks: Stick to established players, avoid smaller subcontractors with weak margins