Market strategy: Kotak Equities adds TCS, SBI Life Insurance in model portfolio, raises weight on L&T

Brokerage firm Kotak Institutional Equities has added Tata Consultancy Services (TCS), India's largest IT services company, and SBI Life Insurance Company to its model portfolio.

Both TCS and SBI Life have been assigned a weight of 150 basis points (bps) in the brokerage’s model portfolio.

Kotak said SBI Life Insurance Company shares are currently trading at 1.6x FY2028 estimated embedded value (EV) and offers an upside potential of around 35% to its 12-month fair value target of ₹2,500 per share.

TCS shares, meanwhile, are trading at 13x one-year forward earnings per share (EPS) and offer an estimated 18% upside to its 12-month fair value target of ₹2,450.

The brokerage, however, clarified that TCS’s inclusion in the model portfolio should not be interpreted as a broader endorsement of the IT services sector. Instead, the move reflects its discomfort with maintaining a significant underweight position in the sector, given the inexpensive valuations of large-cap IT stocks.

“IT services stocks post the severe underperformance of the sector. We have limited insights into the duration and magnitude of potential AI-led deflation in prices and the extent of related margin pressures. We have been quite underweight on the IT services sector for a while,” said Kotak Institutional Equities in a report.

Portfolio Rebalancing

The brokerage firm has also increased the weight on Larsen & Toubro (L&T) by 100 bps to 400 bps.

As part of the portfolio rebalancing, Kotak shifted ICICI Prudential Life Insurance, which carried a weight of 160 bps, from the large-cap portfolio to the mid-cap portfolio. It also removed Mankind Pharma, which had a weight of 140 bps.

Further, the brokerage reduced its exposure to DLF to 30 bps from 150 bps and GMR Airports to 70 bps from 160 bps, citing their recent outperformance.

In its recommended mid-cap portfolio, Kotak added CRISIL, DCB Bank, and ICICI Prudential Life Insurance Company, while removing Dixon Technologies (India), Dr. Lal PathLabs, and Info Edge (India). The brokerage said these stocks were excluded after their strong performance over the past one to three months, which has limited their near-term upside potential.

Market Outlook

Kotak noted that the Indian stock market continues to see wide variance in valuations, with consumption and investment stocks trading at fair-to-rich valuations and BFSI and IT services trading at cheap-to-attractive valuations, resulting in reasonable valuations for the Nifty 50 index.

Going ahead, the brokerage firm sees likely weak monsoons with poor temporal and spatial rainfall distribution and a re-escalation in the US-Iran war in West Asia as the key risks to the market.

“A deficient monsoon season may affect the purchasing power of non-agricultural rural and low-income urban households, depending on the extent of food price inflation, which currently appears manageable,” Kotak said.

Additionally, high food-grain inventory, various central and state income support schemes and higher fiscal flexibility of the central government on lower oil prices may mitigate the impact of weak monsoons.

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