Don't overpay for growth: Nippon Life AMC's Sailesh Raj Bhan on navigating India's next market cycle

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During bull markets, optimism often makes investors forget a simple truth: even great businesses can become poor investments if bought at the wrong price.

For Sailesh Raj Bhan, chief investment officer (equities) at Nippon Life AMC, that principle has guided his investing philosophy for nearly three decades.

As the Indian market recovers from the lows of April, Bhan sees a landscape that is becoming highly attractive. In a conversation with Mint, he highlights why the recent valuation correction offers a prime entry window, how external global trends like the AI trade created accidental bargains in Indian banking, and why an investor's respect for entry prices remains the ultimate defence against market volatility.

Markets have faced headwinds for almost two years, dating back to the highs of September 2024, primarily because valuations had grown expensive. However, a combination of prolonged consolidation and aggressive selling by foreign portfolio investors (FPIs) has normalized valuations across several pockets of the market.

Simultaneously, corporate earnings growth, which remained muted over the last two years, began showing signs of recovery in the recent quarter. As we move past the immediate disruptions caused by geopolitical conflicts, we anticipate corporate earnings visibility to improve significantly over the next two quarters.

When a recovery in earnings coincides with normalized entry valuations, it creates an attractive environment for long-term equity participation. If global crude oil prices continue to stabilize around current levels, we could see surprisingly strong corporate earnings over the next 12 months.

While strategies must naturally adapt as market conditions evolve, our foundational framework remains consistent: do not overpay for growth. The core objective is to acquire sustainable growth businesses at sensible prices.

During the height of the market overvaluation over the past two years, we maintained a significant allocation to large-cap equities, where valuations were relatively insulated and offered better protection.

Over the last few months, however, price corrections have occurred across almost every category. This has allowed us to find value and participate more broadly across large-, mid- and small-cap segments.

When prices are hyper-inflated, the best approach is to remain widely diversified; when corrections occur, you concentrate capital into specific opportunities created by those market shifts.

The primary variable we track is the corporate earnings cycle. We constantly analyse whether a sector is operating at the extreme low of its earnings potential with an active recovery on the horizon.

When you identify a strong earnings recovery cycle in a sector that is deeply out of favour with the broader market, the asymmetric upside can be substantial. Often, these opportunities are triggered by external shifts rather than structural internal failures.

For example, over the last six to nine months, we witnessed intense selling by foreign institutional investors. Because foreign capital is concentrated heavily in large-cap private banks, they had to liquidate what they owned to fund the global AI trade elsewhere. This external flow pressure caused private banking valuations to fall significantly, creating a favourable risk-reward profile.

We saw a similar dynamic in the IT services sector, where valuations dropped sharply due to localized global headwinds, creating an ideal entry window.

India's macroeconomic balance sheet is currently in its strongest position in years. We do not have a credit crisis; the domestic banking system has largely resolved its bad debt issues and is highly stabilized. Similarly, corporate and consumer balance sheets remain resilient.

Our primary systemic vulnerability historically has been energy costs. When crude oil prices spike abruptly to $100 or $110 per barre...