Kotak’s Covid-proof and recovery portfolio of large, mid-cap stocks

With the US Presidential elections out of the way and improving macroeconomic indicators, brokerage and research firm Kotak Institutional Equities is shaping up its stock portfolio to not only dodge the virus but also to capitalise on the recovery pulse. In a recent report, analysts at Kotak said that they see a positive outlook for markets with US elections resulting in a Democrat President but a Republican Senate, falling coronavirus cases, improving activity indicators, and positive surprise in 2QFY21 earnings. “We recommend a mix of ‘Covid-recovery’ and ‘Covid-proof’ stocks but ‘moderate’ certain extreme positions,” the brokerage firm said.

IT and Pharma favoured

In the large-cap space, Kotak Institutional Equities have trimmed their positioning in autos, banks and telecom sectors and allocated the same to IT services and pharmaceuticals. “The financial stocks in the portfolio have had a terrific run over the past one month and the weight of banks, diversified financials and insurance has reached almost 40%. We trim some positions accordingly,” they added.

Bharti Infratel has been erased off the portfolio. “We remove BHIN (130 bps) as we are no longer confident about India being a three-player telecom market, which is critical for BHIN’s financials,” the report said. The challenged financial position of Vodafone Idea is the catalyst behind the move as the brokerage termed the bet on a three-player telecom market as quite risky. They noted that it would be better to play any revenue recovery theme in the telecom sector through Bharti Airtel.

“We reduce weights in MM (70 bps to 200 bps), HCL Technologies (80 bps to 300 bps), INFO (60 bps to 950 bps), AXSB (80 bps to 450 bps) and ICICIBC (80 bps to 900 bps). We add LPC (200 bps) and TECHM (200 bps) and allocate the balance to RIL,” they added.

Additions to mid-cap portfolio

In the mid-cap space, Kotak Institutional Equities added ABB to its portfolio. “ABB’s valuations may look expensive at 26X CY2022E EPS but we would note that earnings reflect bottom-of-the-cycle earnings. We are getting more positive on the domestic manufacturing theme and see ABB as a key beneficiary of the same,” they said. Dalmia Cement, which trades at 6.8X FY2022E EBITDA has also been added.

Further, Jubilant FoodWorks has been added, playing on an expected household income growth, changing consumer preferences and F&B industry consolidation. Mahindra & Mahindra Financial Services is last among the new additions to their portfolio.