From the CIO’s Desk – India Half-Yearly H1 2025

It’s striking how the market narrative has shifted in a matter of months. India’s resilience through multiple geopolitical flare-ups hasn’t gone unnoticed, but what’s more interesting is the opportunities beyond the near-term chaos. In this half-yearly review, we reflect on what has worked well, the structural trends driving opportunities, and the critical questions we’re addressing as we move into the second half of the year. One thing stands out clearly: in a world where geopolitics and local dynamics are increasingly intertwined, success demands both a global perspective and deep local insight. We’ve brought these elements together in this report to help you navigate what’s ahead. Enjoy!

Market Review

Indian equities gained 3.44% (in USD terms¹) in June, bringing H1 2025 returns to 6.55%. Sector-wise, Communication Services and Energy were the top performers, while IT and Real Estate were the laggards.

While corporate earnings showed signs of revival, high valuations led investors to favor more attractive regional markets. This was reflected in weak institutional flows, especially from foreign portfolio investors (FPIs) who net sold USD 8.9 billion worth of Indian equities in H1, despite turning net positive in Q2.² Global headwinds, including volatile crude oil prices and border tensions with Pakistan, also caused some volatility but were mitigated by swift resolutions.

Macro data points saw improvements throughout the first half. Headline consumer price index (CPI) inflation continued to ease, with the latest print in May down to 2.82% y/y (vs 4.26% in January). Food prices, which account for nearly half of the consumer price basket, rose just 0.99% y/y in May compared to 5.97% in January.

This sustained moderation in inflation gave the Reserve Bank of India (RBI) room to implement three rate cuts totaling 100 basis points (bps) in H1 (February, April, and June), including a larger-than-expected 50bps cut in June, before signaling a hold at 5.50% through fiscal year-end. The RBI also announced a 100bps cut to the Cash Reserve Ratio (CRR) to be implemented in four tranches, which will unlock INR 25 trillion (~USD 291 billion) liquidity to the banking system for lending.

Real GDP growth for 4QFY25 (January to March 2025) surprised materially on the upside (7.4% y/y), while FY26 real GDP growth expectations stand at 6.4% and nominal GDP growth at 10.5% y/y. Meanwhile, India posted a fiscal surplus in May, thanks to a higher-than-budgeted dividend from the RBI and improved revenue collections.

Economic momentum remained robust throughout H1, with manufacturing Purchasing Managers’ Index (PMI) hitting a fourteen-month high of 58.4 in June amid strong output and orders. India’s dominant services sector also continued to expand, with the June Services PMI reading rising to 60.4 compared to 56.5 in January.³

Portfolio Commentary & Outlook

What worked for us? Taking stock of the year so far…

As we take stock of 2025 so far, the phrase “bull markets climb a wall of worry” reminds us of the proverbial “wall” that investors have faced over the last 6 months. From tariffs to political uncertainty, to tech disruptions and global conflicts (India/Pakistan, Russia/Ukraine, Middle East), Indian markets have demonstrated resilience in climbing higher despite these headwinds.

While the strong economic recovery of 2020-23 acted as a rising tide that lifted all stocks, the post-2024 market environment has become notably more nuanced. We’re now seeing higher stock dispersion across sectors and market caps, making stock selection increasingly critical. This environment demands a more sophisticated approach combining both global and local insights, rather than relying solely on a siloed, domestic-only perspective.

This is precisely where our team’s unique global setup has proven to be a crucial differentiator compared to other Indian managers. Operating across three strategic locations – New York, Hong Kong, and Mumbai – we’ve built an integrated perspective that captures both macro and micro dynamics.

From our New York headquarters, where I work alongside our senior tech analyst, we maintain a pulse on global geopolitics, economic trends, and, most importantly, US priorities. Because, let’s face it, the US is still one of the largest demand centers of the world and where most innovation is happening. Our Hong Kong-based team members, through extensive travel across Asia, provide invaluable insights into evolving supply chains and manufacturing shifts in response to tariff dynamics. Their deep understanding of trade flows and manufacturing capacity across Asian markets helps us better assess both competitive threats and opportunities for Indian companies looking to capture market share in the global manufacturing landscape. Meanwhile, our Mumbai team’s coverage of small and mid-cap Indian names gives us the depth of research to identify early alpha opportunities. this served us well in H1 as we saw Indian small and mid-caps were still fairly stretched, and we concluded that this time correction still had a bit longer to run. When we bring all of our perspectives together, the discussions and debates we have in our team meetings give us an unmatched level of insight – and that’s what gives us the conviction to navigate through the noise.

Rather than finding comfort in the wisdom of the crowds, we focused instead on what we call “activity pools” – these are themes where we see time, money, and energy being incrementally deployed at scale. By studying these activity pools intensively, examining market structures and demand patterns, we were able to position ourselves ahead of the trends before they became obvious to the broader market.

For example, this approach is starting to play out well in our power infrastructure thesis. For some time, we’d been observing the growing mismatch between existing power infrastructure and today’s evolving energy needs – whether from surging AI-driven demand, aging grids struggling with rising temperatures, or the challenges of integrating intermittent renewable energy sources. By connecting the dots across our global analysts, we identified key beneficiaries along the supply chain. Companies like Reliance Industries, with its renewables and energy storage solutions, and CESC, a major Indian power generation and distribution company, for example, have performed well as these structural trends begin to play out, while other companies like CG Power and Larsen & Toubro should also benefit from the upcycle in coming quarters.

What are the key questions for the future?

Despite the performance and resilience of markets, several questions about India remain that we think are critical to address as we go into the second half.

The first question we’re often asked is: How do you navigate the valuation paradox in India while maintaining good downside protection? Valuations will always be a challenge in a growth market like India. So how should investors handle expensive valuations versus selling the stock too early?

Our approach focuses on identifying companies with a clear “right to win” over the next 4-5 years. If the potential upside is sub-par or the valuation bar is too high, we watch and wait for better entry points. A critical test is assessing what the business could achieve in five years – what could its market cap be? Is the upside meaningful, and does the risk-reward remain favorable? If not, we avoid the stock or trim the position if it’s in the portfolio.

In certain nascent categories (e.g., travel, food delivery, or healthcare) where precedent from other markets shows strong potential as the economy grows, we may overlook near-term valuations. These companies, often in the early stages of scaling, offer multi-bagger potential if they prove scalable and have strong management execution. However, such high-conviction bets would typically only account for around 10-15% of the portfolio, ensuring we don’t miss transformational opportunities while managing risk.

For the majority of the portfolio, valuations are viewed relative to market dynamics and the stock’s earnings growth potential over a 2 to 3-year horizon. We will always prioritize companies with strong operating leverage and limited financial leverage, focusing on consistency and downside protection. If the upside becomes limited, then we trim the position and keep it on our watch list.

The second question we face in India is: As one of the few markets globally growing at 7-8% annually, will India be in a situation where the rising tide lifts all boats?

While the growth story in India is undeniably compelling, it’s important to recognize the challenges that come with such rapid expansion:

• The challenge of rising competition The surge in investor interest has led to increased capital availability, funding numerous new enterprises across sectors. While this drives innovation, it also intensifies competition, potentially pressuring incumbents’ profitability, as evidenced in India’s food delivery sector where established players like Zomato face new challengers like Zepto. This mirrors China’s pre-2014 experience, where despite robust GDP growth, equity returns were challenged by fierce competition until industry consolidation emerged.
• Adoption of new consumer stories takes time A significant driver of future value in India will be determined by consumer spending as the economy grows. Companies that succeed will be those that strengthen their consumer connections, expand across India’s diverse markets, and capture a greater share of wallet. However, India’s value-conscious consumers often take time to adopt new categories and services, meaning many of these growth stories will require patience to scale. While the market may get excited about emerging consumer stories, the reality is that these often take years to fully play out.
  Given these dynamics, we like companies that are able to complement their domestic growth with export opportunities. For instance, Narayana’s Cayman Islands hospital now contributes ~40% of its earnings, providing a stable revenue stream alongside its expanding domestic operations. Similarly, Sansera Engineering, which began as an auto components manufacturer, has successfully diversified into aerospace, supplying to clients across Europe. This export angle provides valuable earnings diversification and growth hedge while the domestic story unfolds.

In addition to the consumer-related growth stories, the other activity pools where we see immense opportunity in India include:

• Opportunities in AI-driven growth and productivity The headlines about technological disruption are impossible to ignore. Microsoft’s recent layoff of ~15,000 employees is likely just the beginning, as companies integrate increasingly sophisticated agentic AI tools into their operations. This disruption will be particularly pronounced in advanced economies, where middle-class knowledge workers face the greatest exposure to AI automation.However, this challenging backdrop creates clear winners and losers. Forward-thinking companies are already leveraging AI to offset margin pressures and enhance productivity. Many of the companies we speak with are sharing anecdotes about gaining comfort with AI applications, transitioning from experimental to production scale. While chips and servers are the immediate beneficiaries, the broader opportunity lies in AI’s ability to expand the whole pie across industries. Rather than just redistributing existing value, AI will create new value by enabling new products and services, creating new markets and business models, solving previously intractable problems, and augmenting (not just replacing) human capabilities.However, the journey from concept to implementation is complex, requiring extensive experimentation, proof-of-concept development, and thoughtful scaling of solutions. This is where IT services companies play a crucial role. With the market for outsourced IT services in data and AI expected to reach US$200 billion by 2029, leading IT services firms are positioning themselves as essential partners in the AI transformation.⁴ These firms are either developing their own enterprise-scale solutions or partnering with leading AI providers to create industry-specific implementations, effectively bridging the gap between AI’s potential and practical business applications.Global macro uncertainties may create near-term headwinds for IT services spending, but we expect this to be temporary. In the environment of heightened cost and competitive pressures, companies are increasingly likely to accelerate their AI investments to capture much-needed productivity gains and maintain competitiveness.
• Multi-year energy infrastructure and manufacturing capex Outside of the AI opportunity, we’re particularly interested in sectors requiring multi-year structural investment, such as the reshoring of US manufacturing capabilities and global infrastructure upgrade. This trend is happening in India as well, as the country is rapidly advancing its energy transition and overhauling its power infrastructure to support industrial growth and supply chain localization.Here, we see significant opportunities in Indian firms that have successfully integrated into international supply chains, capitalizing on competitive advantages such as lower production costs, accessible labor, and a more flexible regulatory environment. This strategic positioning enables these companies to not only meet domestic demand but also to establish themselves as key players in global markets to benefit the “China +1” opportunity. See section below on “Opportunities for the Next Decade” where we feature this theme in more detail.

What will it take to succeed in the future?

This is something we constantly think about, both from the perspective of our own firm and for the companies we invest in.

Success in today’s rapidly evolving market environment requires organizations to embrace disruptive change. The winners will be those willing to cannibalize their existing business models, shake up their organizations, and maintain a hawk-eye focus on productivity. It’s not enough to just protect the status quo. Management teams need to be radical enough to envision how their business will look 3-5 years out and take the necessary steps to stay competitive over that horizon. This requires stable and focused teams that can execute strategic shifts without being distracted by short-term volatility.

Opportunities for the Next Decade

Each quarter, we highlight a compelling theme or opportunity poised to shape the next decade. In previous editions, we have explored healthcare, financial services, and India’s expanding manufacturing footprint. This quarter, our focus is on India’s energy transition and the power infrastructure upcycle.

India is making significant strides in its energy transition, with ambitious renewable energy goals like achieving 500 GW of non-fossil capacity by 2030. At the same time, the country is overhauling its power infrastructure to support growing industries and bring more manufacturing closer to home as part of the “China+1” strategy. The power sector is becoming a key player in this shift.

For years, the country saw limited investment in the power sector, but that is now changing. Spending on power generation, transmission and distribution (T&D) is ramping up. The T&D segment, which was often a weak link, is finally getting much-needed attention. This is crucial as India works to integrate renewable energy sources like wind and solar, which can be inconsistent, and meet the increasing demand for reliable electricity from data centers, manufacturing facilities, and growing cities.

One of the technologies helping make this possible is High Voltage Direct Current (HVDC). HVDC allows power to be transmitted over long distances more efficiently and with fewer losses, something that is becoming increasingly important as power generation spreads out geographically. Only a few companies worldwide are qualified to handle HVDC projects, and firms like Hitachi Energy India (a leader in power grids and HVDC technology) are set to benefit.

Wind energy is also experiencing a revival. Companies like Suzlon, a major Indian wind turbine manufacturer, are gaining momentum as the government and the market shift toward renewable energy that can provide steady, round-the-clock power. At the same time, engineering and infrastructure companies like CG Power (a key producer of transformers and switchgear), Larsen & Toubro (India’s leading infrastructure and engineering firm), and Kalpataru Power (major player in power transmission and distribution projects) are well-positioned to take advantage of the growing investments in T&D and grid modernization.

Power generation companies are also seeing opportunities as the country adds more capacity and introduces policies that prioritize green energy and grid stability. As global industrial policy reorients around infrastructure self-sufficiency and energy security, India’s power sector is not only bridging critical gaps but emerging as a cornerstone of its broader economic and strategic ambitions.

India’s energy story isn’t just about meeting demand; it’s about building a stronger, more sustainable foundation for the future. And as this transition gains momentum, it’s creating opportunities for companies and investors alike.