Latest Model Portfolio Update By ICICI-Direct

Outperformance continues across all portfolios…

• Our indicative large cap equity model portfolio has continued to deliver an impressive return (inclusive of dividends) of 117.1% since its inception (June 21, 2011) vis-à-vis the index return of 97.7% during the same period, an outperformance of 19%. This validates our thesis of selecting companies with sound business fundamentals that form the core theme of our portfolio. Our midcap portfolio has outperformed the benchmark by 2.3x (since June 2011), posting returns of 350%

• Our consistent outperformance demonstrates our superior stock picking ability over these years aligned to our view of favourable risk-reward, good franchisee vs. reward-at-any-risk businesses. Some key performers of our portfolio are Bajaj Finance, HDFC Bank and HDFC in the large cap portfolio while Natco Pharma, Kansai Nerolac and Bajaj Finserv have delivered stupendous returns in the midcap portfolio. We continue to advocate the SIP mode of investment as the preferred mode of deployment given the rich valuations that some pockets of the market have reached. We highlight that the SIP return of our portfolio has consistently outperformed indices. This affirms our belief in the staggered and systematic approach of investment amid market volatility

• Quarterly results are encouraging thereby depicting upbeat domestic economic sentiments (also depicted by November-December 2017 IIP numbers) thereby reinforcing our view of a smart earnings recovery being under way. Sensex companies (ex-banks) posted a robust Q3FY18 performance partly due to the low base due to demonetisation in base quarter i.e. Q3FY17 and adapting of trading channel to the new GST regime. On the sectoral front, in Q3FY18, the auto space continued the positive momentum with overall 16% volume growth on a YoY basis. The key surprise was upbeat M&HCV sales (up 37% YoY)

• Given the outperformance, we have increased the allocation to the auto sector by 100 bps to 17% (vs. earlier 16%). The portfolio ideology remains receptive to newer opportunities available in the market. Subsequently, we have made several changes to the portfolio. The new additions in our large cap portfolio is ITC. Moreover, in addition to the auto sector, we have increased allocated weights in L&T. In our midcap portfolio, we have added Kalpataru Power. Considering the near term challenges in the business profile, we have reduced our weightage in Tata Motors. We have exited Zee Entertainment from the large cap portfolio. Moreover, given the strengthening crude prices we have also excluded Supreme Industries

• We continue to maintain our high allocation towards the BFSI space with total weightage of 37% in the large cap portfolio and 20% in midcap portfolio. Apart from this, we continue to remain positive on consumption theme with allocation of 19% and 30% in large cap and midcap portfolio, respectively

• Over the last quarter, companies continue to witness pressure on gross margins on account of a rise in commodity prices, which remains low in our portfolio pecking order. Our preferred picks are companies with higher capacity utilisation along with improved operating leverage

• A revival in the capex cycle coupled with a lower interest rate scenario would benefit the BFSI and construction space (SBI, UltraTech, L&T, HDFC and HDFC Bank)

• The large cap equity model portfolio continued its outperformance vis-àvis the index with 117.1% return since its inception (June 21, 2011) vis-àvis index return of 97.7% in the same period. Our sustained preference for high quality names has aided this outperformance on a consistent basis. We continue to be rewarded for our meticulous approach towards stock selection while we endeavour to emulate the broader index

• On the other hand, given the astute selection in the midcap portfolio, the outperformance in the same continues, with a return of 350.1% compared to the midcap index return of 150.4%

• Given the overall outperformance in both (large & midcap) portfolios, the diversified portfolio (combination of 70/30 ratio) has outperformed its benchmark indices

• Since the last update (August 2017), our large cap portfolio has slightly outperformed the benchmark index performance generating a return of 5% compared to benchmark return of 4.8%. The index outperformance was mainly on the back of performance in Gail and Maruti. Our large cap portfolio was impacted by the underperformance of Tata Motors and Eicher Motors

• Our conservative stock selection in the midcap portfolio continues to exhibit strong outperformance vs. the broader indices. The portfolio outperformed with a return of 15.4% compared to index return of 6.1%. Strong performance in Graphite India and Symphony resulted in the outperformance. However, the portfolio performance was impacted by J&K Bank and Bharat Electronics

House view on Index

• We maintain our index targets (Sensex at 37,600 & Nifty at 11,725) with revised Sensex earnings, implying ~17x P/E on FY20E EPS, which is in tandem with the long period average. The earnings growth at the index level will be led by the index heavy (~40% weight) banking & NBFC space primarily tracking bottoming of asset quality pressure and resolution of big ticket stressed assets through NCLT mechanism. In the consumer space, the earnings growth will be led by the auto space