Kotak Institutional Equities has announced significant revisions to its model portfolios, notably removing Tata Consultancy Services (TCS) from its large-cap selection. This decision follows a 19 percent surge in TCS shares since early July.
The brokerage also delisted two prominent real estate firms, DLF Ltd and Lodha Developers Ltd, from its portfolio. Kotak attributed these removals to stagnating industry volumes, likely influenced by affordability concerns in the real estate market. Despite the removals, Kotak maintains its long-term belief in India’s residential real estate prospects and the execution capabilities of DLF and LODHA, noting their strong performance with DLF jumping 32 percent and LODHA 84 percent from recent lows.
Why TCS and Real Estate?
For TCS, Kotak views the IT sector as currently being the “antithesis” of the artificial intelligence (AI) theme in the short term. The firm anticipates high volatility in the sector and is unconvinced that current “reasonable” valuations adequately reflect underlying structural challenges.
Regarding the real estate stocks, Kotak highlighted that both DLF and Lodha had performed exceptionally well since late March/early April. However, the decision to remove them came amidst concerns over stagnating industry volumes, which Kotak believes are tied to affordability issues.
Struggling to Find New Opportunities
Kotak Institutional Equities openly expressed its difficulty in identifying fresh investment opportunities, particularly within the midcap space. This challenge stems from the sharp run-up in stock prices of companies exposed to its favored themes.
“We have had to replace several stocks in our midcap portfolio in the past few months after the sharp run-up in their stock prices; many have run up further,” Kotak stated. The firm also questioned the relevance of valuations for midcap investments due to their narrative-driven nature and frequent shifts in market narratives.
Similar challenges are observed in the large-cap segment, where Kotak notes high valuations across high-growth sectors, fair valuations in moderate-growth sectors, and rich valuations in sectors facing potential disruption risks or questionable long-term growth.
New Allocations
The resources freed up from these removals will be redistributed across several other stocks. Kotak plans to allocate to Adani Ports, Eternal Ltd, HDFC Life, Hindalco, and SHFL. Adani Ports, for instance, is down 10 percent from its recent peak due to market concerns over a reported acquisition in the UK. HDFC Life is considered to trade at valuations that adequately reflect regulatory worries.
Kotak continues to maintain a significant weight on financials, noting that banks and insurance stocks generally trade at attractive valuations, factoring in near-term headwinds. Capital markets and diversified financials (NBFCs) are trading at higher valuations but are experiencing meaningful tailwinds and robust near-term growth.