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July 2021 - Update

The month gone by

* Nifty was up 0.9% in the month of Jun’21, while our Emkay Alpha Portfolio [EAP] was up 1.2%, thus outperforming the benchmark by 29bps. The best contributions came from IT Services, Cement, Consumer and Auto sectors, whereas the EAP performance was dragged down by our positioning in NBFC, Insurance and Banking sectors.

* Among individual stocks, outperformance relative to Nifty was driven by our OW positions on United Breweries (stock was up 15% in Jun’21), Infosys (+13%), Bandhan Bank (+8%), Tech Mahindra (+7%) and Tata Motors (+7%). Further, our UW (NIL) position in Adani Ports helped too as the stock was down 9% in Jun’21. The EAP performance was hurt significantly by a rally in some of our UW (NIL weight) stocks, notably Tata Consumer (Not covered; stock +14%), Bajaj Finance (+7%), HUL (+5%) and Divi’s Labs (+5%). Further, Chola/CIFC (OW) was down 7%, while Shriram Transport Finance (OW) was down 6%—these two also dragged down the EAP performance.

Positioning changes ahead of Q1FY22 earnings season

* Markets are back to near all-time highs amid rising inflation/bond yields. Further, lockdowns witnessed across major states may weigh on the Q1 earnings of certain domestic cyclical sectors. We, thus, shift portfolio weights toward higher quality and defensive domestic plays, and also export-oriented and global plays.

* We marginally reduce weightage of the BFSI sector, but within that we increase the weightage of HDFC Bank, HDFC, Kotak Bank and HDFC Life while reducing the weightage of Axis and Indusind. Nonetheless, we maintain our OW position on SBI, given the tailwinds of resolutions/recoveries and prospects of subsidiary IPOs.

* We also increase portfolio weights on ONGC, NTPC and Bharti Airtel by 50bps each. Finally, we maintain our 200bps OW on Tata Motors, and introduce Motherson Sumi (another non-Nifty stock) in our EAP with a 150bps position.

* Our small & mid cap portfolio (EAP-SMID) once again significantly outperformed the benchmark (BSE-400; up 5.65% in Jun’21) by 3.4pps vs. 5.1pps outperformance seen in May’21. This was led by a solid rally in some of our portfolio stocks such as Firstsource (+31%), Birlasoft (+26%), Persistent Systems (+15%), Radico Khetan (+24%), Polycab (+18%), SRF, KEI Industries and Bharat Forge (these three stocks were up 12-13% each).

Key changes in EAP-SMID

* We remove Persistent and Federal Bank, and introduce Apollo Tyres. We increase the share of Cash to 7% from 4% previously.

* Our SMID portfolio consists of 17 stocks. It is largely an equal-weight portfolio (4-6% weight for a majority of the stocks), except our highest-conviction ideas (7-8% weightage each), which are Ashok Leyland, Bharat Forge, Dalmia Bharat Cement and Westlife Development.

High-Conviction List

* Large-Caps (OW): Tata Motors, SBI, ICICI Bank, Shree Cement, BPCL and Infosys

* Large-Caps (UW): PNB

* Small & Mid-Cap (Buys): Ashok Leyland, Bharat Forge, Birlasoft, Dalmia Bharat, Westlife Development and Radico Khaitan.

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