Kotak buys TCS, SBI Life on cheap valuations, flags monsoon risk

Kotak Institutional Equities has overhauled its model portfolio, adding Tata Consultancy Services and SBI Life Insurance while cutting exposure to recent market winners like DLF and GMR Airports. The brokerage assigned a 150 basis points weight to both TCS and SBI Life, signaling a deliberate shift toward large-cap valuations that have lagged the broader market.

The additions are driven by specific price targets rather than broad sector optimism. SBI Life is trading at 1.6 times its estimated FY2028 embedded value, offering a 35% upside to a 12-month target of ₹2,500. TCS, valued at 13 times one-year forward earnings, has an estimated 18% upside to a ₹2,450 target.

However, the brokerage was careful to frame the TCS purchase as a valuation necessity rather than a turnaround call for the IT sector. “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,” Kotak said.

To fund the new positions, Kotak aggressively trimmed stocks that have already priced in significant growth. DLF’s weight was slashed to 30 bps from 150 bps, and GMR Airports was cut to 70 bps from 160 bps. Mankind Pharma was removed entirely, while ICICI Prudential Life Insurance was shifted from the large-cap to the mid-cap portfolio.

The mid-cap rotation followed a similar profit-taking logic. Kotak added CRISIL, DCB Bank, and ICICI Prudential Life, while removing Dixon Technologies, Dr. Lal PathLabs, and Info Edge. The brokerage noted that the excluded mid-caps had rallied sharply over the past one to three months, limiting their near-term upside.

These trades reflect a broader Indian market characterized by stark valuation divergence. Kotak observed that consumption and investment stocks currently trade at fair-to-rich valuations, while banking, financial services, and insurance alongside IT services sit at cheap-to-attractive levels.

Despite finding value in specific large-caps, the brokerage warned that macro headwinds could disrupt the overall Nifty 50 index. It cited poor rainfall distribution and a potential re-escalation of the US-Iran conflict in West Asia as primary risks.

“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 noted. The firm added that high food-grain inventories, existing income support schemes, and increased fiscal flexibility due to lower oil prices should cushion the economy against a weak monsoon.

Elsewhere in the large-cap portfolio, Larsen & Toubro saw its weight increased by 100 bps to 400 bps, suggesting continued confidence in the capital expenditure cycle despite the broader rotation out of other infrastructure-adjacent names.