Baron India Fund: Latest Insights and Commentary

We are entering a period of increased market volatility as elevated global tariffs imposed by the Trump administration, if not remedied soon, will, in our opinion, most likely lead to a U.S. recession and a broad global slowdown. India is well positioned in this scenario, as it is primarily a domestic consumer-driven economy with a low share of global trade. As exports to the U.S. account for only around 2% of India’s GDP, we expect the announced tariffs to have a modest impact in the range of 0.2% to 0.7%. Put another way, India’s real GDP growth trajectory will likely trend down from 6.5% to 7.0% to 6.0% to 6.5%, which still positions the country as the fastest growing large economy in the world.

A few factors could broadly offset any impact from the tariffs. First, the U.S. and India are in active discussions to sign a Bilateral Trade Agreement (BTA) with a goal to more than double trade to $500 billion by 2030. The execution of a BTA should trigger a meaningful reduction in tariffs and set the stage for increased bilateral trade, which would be a win for both countries. Second, should a global slowdown occur, the expected weakness in energy prices will act as a fiscal tailwind for and boost consumption in India, as the country imports over 85% of its oil. Lastly, the recent correction in the U.S. dollar should be another relative tailwind for the rupee (India’s currency) and Indian equities.

Going forward, we believe U.S.-India economic and military ties will further strengthen given shifts in the geopolitical landscape, especially amid rising tensions between the U.S. and China. As more companies diversify their manufacturing footprint and vendor relationships ex-China, this should position India as an attractive export hub over time. The current tariff war between China and the U.S. is likely to accelerate this trend. As the world transitions from globalization to a “multipolar or regional” trading order, we believe India will continue its rise on the global stage as source of opportunity for its trading partners.

We are optimistic and excited about India's long-term growth potential and view any short-term market corrections as an opportunity to establish positions in one of the world’s most promising investment destinations. Over time, we believe India will become a dedicated asset class for global allocators given the superior risk adjusted returns generated over the past two plus decades and the attractive growth outlook and geopolitical tailwinds that lie ahead.

CONTRIBUTORS

• Bajaj Finance Limited is a leading non-bank financial company in India. Shares increased on strong quarterly earnings and signs of easing concerns about asset quality. The recently announced transition of long-time Managing Director Rajeev Jain to an Executive Vice Chairman role was also welcomed by investors, as the move ensures continuity. We retain conviction in Bajaj due to its best-in-class management team, robust long-term growth outlook, and conservative risk management frameworks. We think the company is well positioned to benefit from growing demand for consumer financial services such as mortgages and personal and credit card loans, among other related products.
• Bharti Airtel Limited contributed during the quarter driven by steady earnings performance and visibility into strong future free cash flow generation, as the company has passed its peak capex intensity. As India’s dominant mobile operator, Bharti is profiting from ongoing industry consolidation. In particular, Vodafone Idea, a key player and competitor, is on the verge of bankruptcy amid severe pricing pressure and an unsustainable balance sheet. We retain conviction as Bharti transforms into a digital services company and benefits from rising mobile tariffs.
• Cholamandalam Investment and Finance Company Limited (Chola) is a leading non-bank financial services company in India. Chola’s core business is vehicle finance, and it has diversified into other verticals, including loans against property, home mortgages, and loans to small and medium-sized businesses (SME), which help offset the cyclicality of its auto financing business. Shares rose on better-than-expected quarterly earnings and improving asset quality trends. We retain conviction. The company takes a conservative approach to loan underwriting and collections, and it has demonstrated strong asset quality trends through credit cycles. In our view, Chola is well positioned to benefit from growing demand for consumer financial services in India, and we are optimistic about several opportunities, including its newly launched unsecured consumer and SME loans product and further roll out of its home loans. We expect Chola to sustain 20% to 25% loan growth over the next three to five years while generating an attractive 20%-plus return of equity.

 

DETRACTORS

• Trent Limited is a leading retailer in India that sells private label apparel direct-to-consumer through its proprietary network. Shares were down this quarter on lower-than-expected quarterly sales due to soft consumer spending in India combined with some store upgrades and consolidations. We remain shareholders, as we believe the company will generate over 25% revenue growth in the near to medium term, driven by same-store-sales growth and outlet expansion. In addition, we believe operating leverage and a growing franchisee mix will lead to better profitability and return on capital, driving more than 30% EBITDA CAGR over the next three to five years.
• Kaynes Technology India Limited is a leading electronics manufacturing service (EMS) player in India, offering services across the automotive, industrial, railway, medical, and aerospace and defense industries. Shares were down this quarter due to lower-than-expected quarterly sales, as execution on a subset of industrial-related orders was temporarily delayed. We retain conviction in Kaynes Technology, as we believe it is well positioned to benefit from the government's Make in India initiative, which encourages domestic manufacturing of electronic components by providing attractive tax subsidies and manufacturing infrastructure. We are excited about the company's decision to set up an Outsourced Semiconductor Assembly and Test facility, which we believe represents significant incremental growth opportunity in the medium term. We expect the company to deliver over 30% compounded EBITDA growth over the next three to five years.
• Zomato Limited is India's leading food delivery platform, with roughly 55% market share. Shares were down this quarter due to greater-than-expected losses in its quick commerce business, as the company increased investment amid rising competition. We retain conviction, as we believe Zomato is well positioned for the long term in the quick commerce industry, given its first-mover advantage, scale, and superior execution. We think Zomato will continue to benefit from structural growth in online food delivery in India, potentially doubling its revenue as well as improving profitability and growing earnings over the next three to five years.