Kotak Institutional Equities has made a few changes to their recommended large-cap model portfolio. They have removed Vedanta, and reduced weight in Infosys by 100 bps, bringing down the weight to an ‘internal’ cap of 10 percent.
Apart from Infosys, reduction of weight was seen in M&M (30 bps) and RIL (70 bps) and allocated the same weightage to Bajaj Finance(200 bps), ICICI Bank (50 bps) and Maruti Suzuki India (100 bps).
On the other hand, Kotak Institutional Equities mid-cap portfolio has remained the same. It includes stocks like CESC, Cholamandalam, Escorts, Equitas Holdings, Federal Bank, Jubilant FoodWorks, Kalpataru Power, MindTree, Petronet LNG and Prestige Estate.
Earnings are key for long term
D-Street gave a thumbs up to the Interim Budget and we saw Nifty climbing crucial resistance levels in a hurry but only earnings recovery will support the market in the long term, Kotak Institutional Equities said in a note.
The government in the Interim Budget announced several measures that could boost the income of small and marginal farmers and also raise net income of a section of individual taxpayers.
December quarter results have boosted confidence in FY19-20 net profit estimates with ‘corporate’ banks showing a sharp decline in slippages and achieving comfortable provision coverage ratios after several quarters of high provisions. This should logically lead to a sharp decline in loan-loss provisions from FY20.
“We note that macro and politics will matter in the short term but earnings will become more relevant once the election uncertainty gets over by May 2019. We expect RBI to cut policy rates in its subsequent meetings, drawing confidence from the government’s reasonably conservative fiscal math despite election compulsions,” said the report.
From a top-down basis, the market valuations look reasonable with Nifty-50 trading at 16.3X FY20E ‘EPS’ and 14.1X FY21 ‘EPS’ in the historical context and versus bond yields.
However, the wide dispersion in valuations across ‘quality’ stocks and ‘value’ stocks renders the top-down valuation view rather meaningless.
The domestic brokerage firm in the note also highlighted that investors face a tough choice between super-expensive ‘quality’ stocks (“want to buy them but can’t buy them”) and super-cheap ‘value’ socks (“can buy them but won’t buy them”).
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