Kotak Institutional Equities tweaks midcap model portfolio towards ‘reopening plays’

Kotak Institutional Equities expects modest returns from the Indian market in the base-case scenario of a strong economic recovery and a gradual increase in global and domestic bond yields, but stock-specific action will continue, especially in midcaps.

However, it said the markets could see a meaningful correction in the event of a sudden and sharp spike in bond yields linked to negative surprises on inflation.

The Nifty 50 Index is trading at 22.1 times the EPS of FY2022E and 19.4 times the EPS of FY2023E, which suggests the market is already pricing in strong earnings growth and stable/moderately higher bond yields.

However, the equity markets will have to adjust to the reality of higher interest rates as central banks start to implement ‘exit’ plans for their ultra-loose monetary policies over the next few months.

While there could be some consolidation in the benchmark indices, Kotak has  tweaked the midcap portfolio of 18 stocks to include Kensai Nerolac Paints, Sobha Ltd. and Whirlpool.

The 18 stocks that are part of the Kotak Institutional Equities portfolio include ABB, Apollo Hospitals, Jubilant FoodWorks, Thermax, Varun Beverages and Max Financial Services.

Kotak Midcap

“We add KNPL, Sobha and Whirlpool to the midcap portfolio. We see Sobha a solid play on the residential real estate cycle. We are positive on a multi-year investment cycle for reasons discussed previously,” Kotak said in a report. “The stock has seen a sharp recovery from bottom levels but is only moderately higher versus pre-pandemic levels. Our 12-month Fair Value for the stock is Rs 520.”

The domestic brokerage firm also added Whirlpool to the portfolio. The stock has hardly performed over the past 12 months, resulting in more reasonable multiples. The stock trades at 37 times the EPS of FY2023E versus its pre-COVID two-year forward multiple of 42 times.

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