Edited excerpts from a chat:
How does a concentrated portfolio of around 30 stocks in your Focused Equity Fund help generate alpha and outperform the benchmark?
A focused strategy tends to strengthen both conviction and results. With a limited number of investments, the approach is usually such that only highly persuasive ideas end up in the portfolio, all of which have meaningful weight. This approach therefore entails relatively higher risk due to the larger positions, but usually offers a proportionately higher reward if the investment positions are properly executed. Typical equity weightings average 3 to 4% and can be as high as 10%.
What is the starting weight for a new stock idea in such a portfolio?
A minimum starting allocation of 2% is maintained, with room to scale up to a maximum allowable 10% depending on conviction and portfolio construction requirements.
How has sector positioning evolved within IT, especially given concerns about slow earnings growth and weak stock performance?
We were underweight IT until mid-2025, after which we switched to an overweight position. This shift was driven by a more than 10% relative underperformance of the IT sector versus the broader market, improving visibility of the trough in enterprise technology spending in the US and Europe, and by strong deal strength reflected in the second quarter results. While revenue growth will likely be seen with some lag, the momentum of the deal indicates that enterprise technology spending is likely to stabilize. Moreover, the softer outlook for the domestic currency provided additional support. The investment framework aims to take positions in sectors when the risk-reward trade-off appears favourable, especially when the overhang begins to decline and catalysts for recovery become visible.
How has the portfolio’s market cap positioning evolved given expectations of broad double-digit earnings growth next year?
The strategies I manage invest primarily in mid- and large-cap stocks, with limited exposure to small caps. Generating alpha is largely determined by bottom-up stock selection. Two years ago the portfolio was overweight capital goods and related sectors. Over time, this exposure shifted to consumption-driven segments, including autos, consumer durables and staples, and construction materials, given the view that low-cost consumption had suffered a prolonged slowdown and was likely positioned for recovery. Recent reductions in income tax and VAT have supported this thesis. While the recovery in consumption has yet to translate into a broad rally, the portfolio is largely ahead of that cycle. We think it will take a little longer for private investment to revive, while public investment is expected to remain focused on power and defense areas.
How is innovation approached in the special Innovation Fund, especially given India’s limited direct participation in emerging themes such as AI and deep tech?
The aim here is to invest in companies that have a tendency to gain market share. We believe that innovation is one of the fundamental drivers for organizations to sustainably expand their market share. Innovation can be product-driven, service-driven or cost-driven. The investment universe can be divided into three broad categories. First, traditional leaders innovate within their industries, such as automotive and telecom companies that use advanced technologies to gain market share. Second, companies directly exposed to new trends such as digital advertising, solar energy, GPU-connected EMS players and specialty pharmaceutical companies with complex product pipelines, and third, platform-based companies representing business model innovation, consumer behavior reshaping and industry structures.There are currently six themes within the listed universe that broadly determine the innovation landscape. These are defense (electronic warfare, satellites), automobiles (EV and hybrids), pharmaceuticals (Specialty / Complex Generics), IT services (as a facilitator of cloud and AI transitions), digital platforms and energy transition (solar, EPC, module and cell production). The goal here is to build a long-term, cyclically resilient portfolio of reasonably valued, high-growth companies where innovation is the key driver.
Given the fund’s overweight position in IT, is there concern that Indian IT companies are lagging behind in the AI cycle?
We believe that Indian IT is largely well-positioned as global AI adoption is still in the pilot phase, especially in enterprise environments. As AI implementation evolves into full-scale adoption, IT service providers are likely to play a central role as solution providers and system integrators. Indian IT companies are not focused on product development, but on enabling enterprise-wide AI adoption, an area where demand is expected to increase. Even when it comes to coding, the automation of code generation has been going on for over a decade. The only change now is that AI can accelerate this. Lower coding costs can help expand the universe of software development, supporting higher innovation within enterprises. Companies that use AI for revenue growth will likely benefit more than companies that view AI exclusively from a cost-saving lens.
What is the outlook for the banking and financial services sector, in the context of the ongoing rate cut cycle?
The outlook appears to be gradually becoming constructive, especially for the large private sector banks. While rate cuts may put pressure on margins in the short term, the broader picture over a two-year period appears largely favorable. As policy rates stabilize, earnings headwinds are likely to diminish, deposits will be broadly revised and the credit growth cycle may strengthen. Trends in NIMs, credit growth, credit costs, potential FII inflows and valuations appear to be collectively creating a constructive stance over the medium term.
How does this view compare to the prospects for PSU banks?
The valuations of the PSU banks have been revised. Their loan portfolios generally have lower margins. As credit costs have remained largely favorable over an extended period, there appears to be little room for positive surprises. Given the potential earnings sensitivity to even small changes in credit cost assumptions, the risk-return ratios appear less favorable.
Which market segments currently offer valuation comfort?
Technology and large private banks appear to be fairly valued. NBFCs appear expensive, but the near-term outlook remains positive. Consumer stocks remain highly valued but could still witness a revaluation if earnings growth accelerates, supported by GST gains, narrowing of price differentials with unorganized players, rising wages in the blue-collar segments and a potential revival of low-cost consumption. Overall, the market appears to be in a subdued yield environment, supported by healthy corporate balance sheets, controlled fiscal conditions, a potential turnaround in financial flows, accommodative central bank policy and an impending catalyst in the form of a US-India trade deal. However, despite improving sentiment, higher starting valuations can undermine overall returns.
Are there any counter-possibilities that stand out for the new year?
Several names in power and cooling, including AC makers, have underperformed and could see a turnaround as things normalize. Cement also appears to be increasingly (not very convincing) contrarian, with consolidation potential and a slight improvement in sector dynamics despite its commodity characteristics.
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