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The month gone by

The Nifty-50 index was up 3.5% in August, while our EAP-Nifty (Emkay Alpha Portfolio) was up 3.8%. The highest positive alpha was generated by our OW position on M&M [the stock was up 12%], followed by ICICI Bank, Bharti Airtel, NTPC, and Power Grid – all of which gained 7-8%. Our UW on Infosys/TCS [down 3-4%] also aided alpha generation. EAP performance was dragged down by our UW position on Bajaj Finserv [+13%] and Nestle [+3%].

Our small-mid cap model portfolio (EAP-SMID) was up 6.8% in August, outperforming the benchmark BSE400 [+5.8%] by 100bps. Of the 19 stocks in our August portfolio, 15 were up, one was flat, while three were down; further, 10 of the 19 stocks outperformed the BSE-400. The best performance came from KEI Industries [+19%], followed by Sapphire Foods, Varun Beverages, Karur Vysya Bank, and Escorts – these were up 15-17% in August. The worst performing stocks were Inox Leisure [-15%], Max Financial [-4%], and Firstsource Solutions [-4%]. We remove Oil India and Firstsource Solutions, and add Canara Bank and Kalpataru Power. We maintain Cash at 500bps. Our SMID portfolio has 19 stocks (unchanged), and it is largely an equal-weight portfolio (4-6% weight for each).

On a trailing 12M basis, EAP-SMID gained 26% versus a 7% increase in BSE-400. EAP-Nifty’s performance has been broadly in-line with Nifty-50 index in the last 1/3/6/12 months.

Large-cap portfolio – OW on domestic demand-driven and commodity-consuming sectors; we add more defensiveness incrementally

With Nifty-50 [17,542] at 19.6x forward P/E, valuations are expensive relative to: own-history, current bond yield, and MSCI-EM valuations. Valuations face headwinds from FPI-outflow-risk (FED’s hawkishness/strong DXY) and potentially from higher-for-longer inflation in India as well as globally. Further, lower Q1FY23 GDP growth, further slowdown (moderating global growth), and incremental margin pressure in Q2 may post earnings risk. In the immediate term, markets may find support from softer crude/commodities (China slowdown and Covid shutdown) and news flow around inclusion of G-Secs in global bond indices. However, this may not last for long; and therefore, we add incremental defensiveness to our portfolio by shifting some allocation away from Metals and Energy toward FMCG and Pharma. We also shift 25bps from Autos to Cement. Overall, we continue to maintain a significant OW stance on Banks, Autos (OEMs mainly), and Consumer Discretionaries

Large-cap portfolio summary

* Banks [150bps OW; no change]: Top OW positions in Nifty-EAP are ICICI, followed by IIB/HDFCB/SBI/KMB. In EAP-SMID, we already have KVB and have now added Canara Bank.

* Autos [100bps OW; down 25bps]: We shift 25bps from Bajaj Auto to Eicher (now 25bps OW) and reduce M&M’s OW to 25bps from 50bps post significant outperformance. We are OW on M&M, Maruti, Hero MotoCorp, Tata Motors, and Eicher. We are UW on Bajaj. In the EAP-SMID, we have Ashok Leyland, Escorts, and Motherson Wiring.

* Consumer Goods and Retail [60bps OW; up 50bps]: We go tactically OW by 25bps on Asian Paints (crude price softening) and Titan (positive management commentary for the upcoming festival season). We are neutral on HUL and Tata Consumer and UW on Nestle. In EAP-SMID, we have ABFRL, TCNS Clothing, Sapphire Foods, Westlife, and Varun Beverages.

* Oil & Gas [100bps UW; down 50bps]: We go Neutral on ONGC (from +25bps earlier) and go further UW on RIL by 60bps from 30bps previously.

* IT Services [350bps UW, no change]: We bring HCL Tech and TechM to EW from UW previously, and go more UW on Infosys and TCS. We do not have any IT stocks in EAP-SMID after removal of FSOL.

* Other changes: Cement [75bps OW, up 25bps], Pharma [40bps OW, up 30bps], and Metals [50bps UW, EW earlier]

* Other OW sectors: Engineering and Capital Goods, Insurance, Utilities, and Telecom High-Conviction List

* Large-Caps (OW): ICICI Bank, Hero MotoCorp, Maruti Suzuki, and SBI

* Large-Caps (UW): PNB

* Small & Mid-Cap (Buys): ABFRL Ashok Leyland, Escorts, Karur Vysya Bank, Sapphire Foods, and Westlife Development

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