The month gone by
The Nifty was down 3.90% in November, while our Nifty-EAP (Emkay Alpha Portfolio) was down 4.35%, thus underperforming the benchmark by approximately 45bps. The performance of our large-cap model portfolio was negatively impacted by the OW positioning on Banking, Auto & Auto Ancillaries, and Cement sectors. Further, the performance was aided by OW on Pharma and UW on Consumer Goods & Retail sectors. Among individual stocks, the highest negative alpha came from our OW on IndusInd Bank (the stock was down 22%), followed by SBI, Motherson Sumi, BPCL and ICICI Bank – these four stocks were down 6-11% in November. Significant positive alpha mainly came from our UW on RIL, HUL, Bajaj Finance and Bajaj Finserv – these stocks were down 3-6% in November.
Our small & mid cap portfolio (EAP-SMID down 1.37% in November) performed broadly in line with the benchmark (BSE-400: -1.34%). The trailing 6-month performance of EAP-SMID is +29% vs. an increase of 16% in the BSE-400. Of the 20 stocks in our SMID portfolio, 8 gave positive returns in November. Best-performing stocks were: KEI Industries (+21%), Birlasoft (+17%), TCNS Clothing (+8%) and Varun Beverages (+5%). Worst-performing stocks were: HG Infra, Firstsource, Ramco Cements, Birla Corp and Bharat Forge – down 10-19% in November. We have removed Heranba Industries (down 8% in Nov, down 20% over last 6M) and added Aditya Birla Fashion (ABFRL) in our EAP-SMID. ABFRL is also one of our high-conviction ideas. TVS Motor remains in our EAP-SMID portfolio, but no longer in the high-conviction list. We allocate 100bps to Cash in the portfolio vs. 300bps previously. Our SMID portfolio has 20 stocks (same as before), and is largely an equal-weight portfolio (4-6% weight for each).
We remain biased toward structural themes of capex revival (infrastructure, corporate capex and residential real estate), pick-up in discretionary consumption (post-unlock demand, festive season) and exports. We maintain significant OW on Banks and Autos/Ancs, Infrastructure (Cement, Power, Engineering & Cap Goods) and Pharma sectors, while we maintain our significant UW on Consumer Staples.
However, in view of potential headwinds such as Covid/Omicron uncertainty, inflationary trends (supply issues, margin vs. volume trade-off), temporary softness in rural consumption, impending uptick in global/domestic bond yields, tapering by the Fed, and the strengthening dollar, we make tactical changes to our large-cap model portfolio to add more defensiveness. We have raised the weightage of Insurance, IT services and Telecoms sectors, by marginally reducing the weightage of NBFCs, Metals, Oil & Gas and Consumer Staples. We do not think that Consumer Staples provide robust defensiveness given: 1) rural softness; 2) input cost inflation; and 3) elevated valuations, supported partly by lower bond yields. We, however, maintain our bullish view on consumer discretionary names, as we believe that they stand to benefit from structural trends in the long term (penetration and GDP growth, formalization, premiumization), and full-unlocking plus festival/wedding demand in the short term.
* Banks [300bps OW maintained]: 50bps weight shifted from IIB to Kotak Mahindra Bank. SBI remains the largest OW (100bps), while Axis Bank remains an EW. We also have Equitas SFB in the EAP SMID.
* Autos [300bps OW maintained]: 50bps shifted from Motherson Sumi to Bajaj Auto. We have OW on all the stocks except for M&M. In the SMID EAP, we have TVS Motor (new launches, EV upside, exports), Bharat Forge and Apollo Tyres.
* Cement, Engineering & Cap goods and Pharma: No changes. OW maintained.
* Consumer: We are bullish on consumer discretionary names in EAP Nifty (Titan, UBBL) as well as in EAP SMID (Varun Beverages, Westlife, ABFRL, TCNS Clothing). Inox Leisure was added to the EAP-SMID in November.
* IT services: Now an EW vs. marginally UW earlier. The underweight position on TCS was reduced to 50bps from 150bps, in view of the rating upgrade (to Buy) by Emkay IT analyst (Dipesh Mehta).
* Other changes: 50bps shifted from Shriram Transport Finance (NBFC) to HDFC Life (Insurance). 50bps shifted from Hindalco (Metals) to Bharti Airtel (Telecom). BPCL remains an OW (+50bps) but has been removed from our large-cap conviction list.
* Large-Caps (OW): Eicher Motors, ICICI Bank, Infosys, Maruti Suzuki, and SBI
* Large-Caps (UW): PNB
* Small & Mid-Cap (Buys): ABFRL, Bharat Forge, Birlasoft, Sunteck Realty, Varun Beverages, and Westlife Developmen.
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