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The month gone by

Nifty-50 Index was up 8.7% in July, while EAP-Nifty (Emkay Alpha Portfolio) was up 8.4%. The highest positive alpha was generated by our OW positions on IndusInd Bank [+31%], ICICI Bank [+16%], and SBI [13%], followed by Titan/SBI/L&T/UPL/UltraTech, which were up 16-21%. EAP performance was dragged down by our UW positions on Bajaj Finserv [+38%] and Bajaj Finance [+33%], followed by Nestle and Tata Consumer, which were up 11% and 15%, respectively. Within Nifty-50 index, merely five stocks were down during July.

Our small-mid cap model portfolio (EAP-SMID) was up 13.4% in July, outperforming the benchmark BSE-400 [+9.9%] by ~350bps. Of the 20 stocks in our July portfolio, 19 were up, while one [Oil India: - 25%] was down. The best performance came from: Star Health [+52%], Karur Vysya Bank [+31%], Page Industries [+21%], and Escorts [+20%]. Key changes to SMID portfolio: Removed Star Health, Page Industries, Devyani International, and Minda Industries; Added Ashok Leyland, Sapphire Foods, and Gravita. Further, we have increased cash to 500bps from 300bps. Our SMID portfolio has 19 stocks (20 previously) and is largely an equal-weight portfolio (4-6% weight for each).

On a trailing 12M basis, EAP-SMID gained 17.7% versus a 1.6% increase in BSE-400. EAP-Nifty’s performance has been almost in-line with Nifty-50 Index in the past 1/3/6/12 months.

Large-cap portfolio – Reiterate OW on domestic demand-driven and commodityconsuming sectors; Adding more defensiveness tactically. We maintain significant OW stance on banks, autos (OEMs and ancillaries), and consumer discretionary stocks. However, incrementally, we have added a more defensive character to our portfolio, as: (1) DXY Index is down merely 2.5% to 105.8 from the recent 108.5 peak, suggesting absence of decisive risk-on sentiment; (2) long-term inflation expectations [US 5Y5Y forward] have been rising after bottoming in midJuly; (3) we do not see the FED relenting on financial tightening, based on weak activity data, until inflation is decisively brought under control; and (4) despite moderation in 10-year G-Sec yield, Nifty has become more expensive on ‘yield gap’ (~195bps vs. 125bps historical average), as well as relative to the MSCI-EM Index (73% P/E premium now versus 43% average). Furthermore, margin pressure (from commodity prices) is yet to peak in some sectors, such as FMCG and Cement, and select Auto OEMs. Thus, we tactically shift some allocation away from Banks, NBFCs, Energy, and IT Services toward FMCG, Insurance, Utilities, and Telecom.

Large-cap portfolio summary

* Banks [150bps OW; down 50bps]: We reduce IIB and SBI weights by 25bps each, and shift 25bps from Axis to Kotak. ICICI Bank has the top OW position in Nifty-EAP

* Autos [125bps OW; No change]: We shift 25bps from Maruti to M&M (now 50bps OW). We remain OW on M&M, Maruti, Hero MotoCorp, and Tata Motors. We remain Neutral on Bajaj and Eicher. In EAPSMID, we have Escorts, Ashok Leyland, and Motherson Wiring.

* Engineering and Capital Goods, Insurance, Utilities, and Telecom: We are increasing our OW stance. We have raised the weightage of NTPC, Power Grid, and Bharti Airtel by 25bps each.

* Consumer Goods and Retail [10bps OW; up 60bps]: We are Neutral on HUL and APNT but OW on ITC, Britannia, Marico, and UBBL. In EAP-SMID, we have ABFRL, TCNS Clothing, Sapphire Foods, Westlife, Varun Beverages, and Inox Leisure.

* Oil and Gas [50bps UW; down 60bps]: RIL is marginally UW now. We have also reduced 25bps from ONGC, but it still has an OW stance.

* Pharma [10bps OW; down 25bps]: We have removed Gland Pharma from EAP. We remain OW on Cipla and Sun Pharma.

* Other details: Cement [50bps OW, no change], IT services [350bps UW; down 25bps], Insurance [+25bps, SBI Life is now a 50bps OW], and NBFCs [Added CIFC, a non-Nifty stock].

High-Conviction List

* Large-Caps (OW): ICICI Bank, Mahindra & Mahindra, Maruti Suzuki, and SBI

* Large-Caps (UW): PNB

* Small and Mid-Caps (Buys): ABFRL, Ashok Leyland, Escorts, Sapphire Foods, and Westlife Development

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