Why Kotak is struggling to find midcap stock ideas

Kotak Institutional Equities in a fresh strategy note said It has removed Tata Consultancy Services Ltd (TCS) from its large-cap model portfolio, noting its 19 per cent jump since early July. It also removed two real estate names DLF Ltd and Lodha Developers Ltd from its portfolio, citing stagnating industry volumes on likely affordability issues.

In the case of TCS, Kotak said the IT sector has been reduced to the antithesis of AI theme in the short term. It said the sector will see high bouts of volatility, adding that it is not convinced that their ‘reasonable’ valuations is reflecting structural challenges.

On real estate stocks, it said: "We remain firm believers in India’s long-term residential real estate prospects and execution capabilities of DLF and LODHA. Both the stocks have performed extremely well since end-March/early-April with DLF jumping 32 per cent and LODHA 84 per cent from the West Asia war trough levels," it said.

Kotak said it would distribute the available resources to Adani Ports, Eternal Ltd,  HDFC Life, Hindalco and SHFL.

The Adani Ports stock, it said, is down 10 per cent from its recent peak on market concerns around a reported acquisition in the UK. HDFC Life stock, the domestic brokerage said, trades at 1.4 times one-year forward EV and 5.6 times 1-year forward NBV, which more than adequately reflects nebulous regulatory worries of investors.

KOtak said it is struggling to find new ideas in the midcap space given the sharp run-up in stock prices of stocks with exposure 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. The narrative-driven nature of midcap stocks and constant and frequent changes in narratives make us wonder the relevance of valuations for investment in midcap stocks in general," Kotak said.

In the largecap also, Kotak is seeing fewer opportunities, given high valuations across high-growth sectors, fair valuations of moderate-growth sectors and rich valuations across sectors with questionable long-term growth and large potential disruption risks.

"We continue to have a large weight on financials with (1) banks and insurance stocks broadly trading at attractive valuations and factoring nearterm headwinds and (2) capital markets and diversified financials (NBFCs) trading at ‘high’ valuations but seeing meaningful tailwinds and robust near-term growth," Kotak said.