CLSA has retained a 14-stock India Focus portfolio after the September quarter sell-off, with banks forming the largest part of the basket and consumption and real estate also receiving strong representation.

The portfolio comes at a time when CLSA believes the market correction has taken valuations to four-year lows. The Nifty fell 5.2% during the July-September quarter as crude prices rebounded and bond yields rose sharply. The correction pushed the Nifty’s 12-month forward price-to-earnings multiple close to its 20-year average, with 30 of the 50 Nifty stocks trading below their respective 10-year average multiples.

HDFC Bank, ICICI Bank, State Bank of India and Bajaj Finance make up the financials core, while L&T, Infosys, M&M, ONGC, DMart, Varun Beverages, Tata Motors Commercial Vehicles, Tata Motors Passenger Vehicles, Vedanta Aluminium and Godrej Properties complete the list.

CLSA’s strategy team also sees a potential improvement in India’s earnings position in the coming months. The brokerage’s India Focus portfolio itself fell behind the Nifty during the September quarter, but has remained ahead over the longer period.

“Our India focus portfolio underperformed the Nifty by 1.7ppt in the quarter but has still outperformed it by 6.1ppt YTD and by 118ppt since inception in January 2021.”

The strongest common thread running through the portfolio is financials. CLSA has four financial names: HDFC Bank, ICICI Bank, State Bank of India and Bajaj Finance. The brokerage says banks have the highest weight in its portfolio and specifically favours the sector alongside consumption and real estate.

HDFC Bank is one of the portfolio’s largest holdings by market capitalisation and trades at 13.8 times estimated FY27 earnings and 11.8 times FY28 earnings. ICICI Bank commands a higher multiple of 16.5 times FY27 earnings and 14.2 times FY28 earnings, while State Bank of India is much cheaper at 10.5 times and 9.4 times. Bajaj Finance, the non-bank financial company in the group, trades at 23.2 times FY27 earnings and 19.3 times FY28 earnings.

The contrast within the group is important. CLSA is not simply betting on one type of financial stock. The portfolio combines two large private-sector lenders, the country’s largest public-sector bank and a high-growth non-bank lender.

Value has also been working in favour of several of these names. HDFC Bank, ICICI Bank and State Bank of India all featured among the top-quintile Nifty stocks on CLSA’s value screen for the October-December quarter, while Bajaj Finance appeared among the top value names as well.

“Value was the best performing style during the quarter, outperforming the Nifty by 2.5ppts.”

The second part of the portfolio is built around companies linked to domestic economic activity. Larsen & Toubro and Mahindra & Mahindra are the two most prominent examples.

Larsen & Toubro trades at 26.8 times estimated FY27 earnings and 20.7 times FY28 earnings, with return on equity expected to rise from 16.8% to 19.3%. Mahindra & Mahindra is valued at 22.2 times FY27 earnings and 17.7 times FY28 earnings, while return on equity is projected to improve from 20.9% to 22.2%.

Mahindra & Mahindra also sits among CLSA’s preferred names on its broader automobile view. The brokerage expects premium-focused automobile manufacturers to fare better than mass-market peers because stronger brands and pricing power should help them absorb cost pressure.

“Premium to outshine mass: We expect premium-focused OEMs (M&M, TVSL, Bajaj Ato and Eicher Motors) to emerge relatively better off. Their stronger brand equity and superior pricing power have enabled them to take more meaningful price hikes, limiting margin erosion versus mass-market peers.”

Infosys is the lone technology company in the India Focus portfolio. The choice stands out because CLSA’s separate technology strategy is cautious about the possibility of a broad valuation re-rating for Indian information technology companies.

Yet the valuation case for Infosys has become more interesting after the sector’s prolonged weakness. CLSA’s portfolio table puts the stock at 13 times estimated FY27 earnings and 12.5 times FY28 earnings. Return on equity is estimated at 34.5% and 35.7%, respectively.

The brokerage’s technology work also shows why the stock can remain in a diversified portfolio even without a strong sector-wide re-rating thesis. Infosys has continued to announce large transformation programmes, including work with Investec and Metsä Group, while CLSA’s broader technology view points to an earnings recovery over the next few years.

The key distinction is that CLSA is not relying on a sharp expansion in technology valuations to support the portfolio. The stock is being held at a much lower earnings multiple than several consumer names in the basket, while its return on equity remains high.

“Consensus expects India to grow at a healthy 14% over the next two years, while consensus expects earnings to accelerate over FY27-FY29.”

CLSA’s consumption exposure is split between Avenue Supermarts and Varun Beverages, two companies with very different business models but strong positions in organised consumption.

DMart is the more expensive of the two on earnings. CLSA’s estimates put Avenue Supermarts at 67 times FY27 earnings and 54.6 times FY28 earnings. Varun Beverages trades at 36.8 times FY27 earnings and 30.3 times FY28 earnings.

The valuation gap shows that CLSA is willing to retain premium consumer businesses even as it becomes more selective across the market. DMart’s multiple remains high, but the company gives the portfolio exposure to organised retail, while Varun Beverages provides exposure to branded beverage consumption.

The brokerage has specifically named consumption as one of the three preferred areas in the portfolio, alongside banks and real estate.

“We favour consumption, real estate and banks in our portfolio. Banks have the highest weight in our portfolio.”

Tata Motors is represented through both its commercial vehicle and passenger vehicle businesses, giving CLSA exposure to two different parts of the automobile cycle.

Tata Motors Commercial Vehicles is valued at 20.2 times estimated FY27 earnings and 16.1 times FY28 earnings. Tata Motors Passenger Vehicles, by comparison, trades at only 7.4 times FY27 earnings and 4.3 times FY28 earnings.

The difference becomes even more apparent in return on equity estimates. CLSA expects Tata Motors Commercial Vehicles to post return on equity of 46.4% in FY27 and 39.4% in FY28. For Tata Motors Passenger Vehicles, the corresponding figures are 11.2% and 16.6%.

This makes Tata Motors one of the more interesting parts of the portfolio from a valuation perspective. The two businesses offer different earnings profiles, with the passenger vehicle business carrying a much lower earnings multiple while the commercial vehicle business has stronger estimated returns.

The broader automobile backdrop remains difficult because commodity inflation is expected to keep pressure on margins. CLSA, however, expects most original equipment manufacturers to see some quarter-on-quarter margin improvement from operating leverage, even though margins should remain below desirable levels.

“We expect the majority of OEMs to report a YoY decline in Ebitda margin on the back of raw material cost inflation. We expect most of the OEMs to report QoQ Ebitda margin expansion on the back of operating leverage benefit.”

At the other end of the portfolio are Oil and Natural Gas Corporation and Vedanta Aluminium. Both trade at substantially lower earnings multiples than DMart, Varun Beverages or Larsen & Toubro.

ONGC is valued at 4.9 times estimated FY27 earnings and 4.8 times FY28 earnings. Vedanta Aluminium is at 7 times FY27 earnings and 6.1 times FY28 earnings.

Vedanta Aluminium also stands out for its estimated return on equity. CLSA expects it to post 124.3% in FY27 and 85.1% in FY28. ONGC’s estimated return on equity is more moderate at 15.3% and 14.2%.

The two names give the portfolio a very different earnings profile from its consumer and financial holdings. They also provide exposure to commodity-linked businesses at valuations that are substantially below those of several other names in the basket.

This part of the portfolio fits with the strong performance of value stocks during the September quarter. CLSA’s screen for the October-December period continues to include several financial and industrial names among the top value stocks.

“Value was the best performing style during the quarter, outperforming the Nifty by 2.5ppts. Momentum also beat the benchmark by 1ppt, while growth performed broadly in line.”

Godrej Properties is the portfolio’s sole real estate name, but it is one of the more striking valuation stories in the basket.

CLSA estimates the company at 34.6 times FY27 earnings, but that multiple falls to 13.3 times FY28 earnings. Return on equity is also projected to rise sharply from 7.4% in FY27 to 17.2% in FY28.

That combination of earnings growth and improving return ratios is why Godrej Properties fits into CLSA’s preferred real estate allocation. The company also gives the portfolio exposure to a domestic growth segment without adding another financial or consumer name.

CLSA’s portfolio construction shows that the brokerage is not simply buying the cheapest stocks. It is combining low-multiple names such as ONGC and Tata Motors Passenger Vehicles with businesses carrying much higher valuations but stronger growth or return profiles.

The portfolio looks varied on the surface, but the underlying approach is fairly consistent. CLSA is favouring companies that can withstand a period of uncertain global conditions while retaining exposure to domestic growth, financial intermediation, consumption and selected value opportunities.

The September quarter correction has also changed the valuation backdrop. CLSA said 30 of the 50 Nifty stocks now trade below their 10-year average multiples, while the Nifty’s forward price-to-earnings multiple has fallen to a four-year low. At the same time, the brokerage cautioned that mid- and small-cap valuations have moved higher relative to the Nifty after their recent outperformance.

That helps explain the mix. HDFC Bank, ICICI Bank and State Bank of India sit at the centre of the portfolio because banks have the largest allocation. Bajaj Finance adds a higher-growth lending business. Larsen & Toubro and Mahindra & Mahindra bring domestic economic exposure, while Infosys offers a beaten-down technology name.

DMart, Varun Beverages and Godrej Properties cover consumption and real estate. ONGC, Vedanta Aluminium and Tata Motors Passenger Vehicles provide lower-valued options, while Tata Motors Commercial Vehicles adds exposure to a business with much stronger estimated returns.

The portfolio did not escape the September quarter sell-off. CLSA said its India Focus portfolio underperformed the Nifty by 1.7 percentage points in the July-September quarter. Four of its 15 portfolio positions outperformed the index during the quarter.

However, the longer record is stronger. The portfolio has beaten the Nifty in 18 of the 23 completed quarters since inception and was ahead by 6.1 percentage points year-to-date as of the report. Since January 2021, CLSA said the portfolio had outperformed the Nifty by 118 percentage points.

The strategy therefore comes down to a fairly balanced mix of valuation and earnings.

For the forthcoming quarters, the brokerage’s central argument is that the market correction has done some of the valuation work already. With earnings expectations facing smaller cuts than in earlier quarters and several large companies trading below historical valuation levels, CLSA is positioning its portfolio around businesses it believes can hold up through the external pressure while benefiting when the earnings picture improves.