Navigating Risk and Building for the Next Cycle

Performance Update
As of June 2025, an investment of ₹1 crore in the Itus portfolio has grown to ₹4.30 crore after fees and expenses. In comparison, the same investment in the benchmark index would have yielded ₹3.46 crore.

The fund has delivered an IRR of 18.72% since inception, post fees and expenses.

While January and February 2025 were marked by underperformance, primarily due to a correction in our pharma exposures following tariff-related developments, the subsequent recovery has been strong, underpinned by consistent earnings growth across portfolio companies.

 

Macro View: A Shift Underway
In our recent fund call, we highlighted three macro developments that may shape the upcoming cycle:

1. Union Budget Capex moderates:
   Between FY21 and FY24, central government capex expanded at a robust 23% CAGR. However, the FY26 Union Budget signals a shift toward fiscal prudence, with a targeted fiscal deficit of 4.4% of GDP. This points to a moderation in government-led infrastructure spending.
2. Private Capex as the new engine:
   With the RBI easing liquidity (a 50 bps repo rate cut and 100 bps CRR reduction), the cost of capital in India is at a two-decade low. This macro backdrop, combined with easing inflation and the upcoming Pay Commission 2026 stimulus, sets the stage for a private capex-led cycle.
3. Sectoral Earnings to concentrate:
   Over the past three years, earnings growth has been broad-based. That trend now appears to be narrowing. We anticipate leadership to consolidate among companies with pricing power, differentiated IP, operational edge, or distribution strength.

 

Portfolio Thinking: Managing Concentration and Liquidity

• Weighted Average Market Cap: ₹3.3 lakh crore
• Active Ratio: 68% (Active share is a measure of the difference between a portfolio’s holdings and those of its benchmark, a metric to determine active portfolio management).
• The portfolio maintains a balance between growth potential and valuation comfort.
• Liquidity and the balance sheet strength remain central to allocation decisions.

 

Sector Positioning: Where We Are Invested
Overweight Allocations:

• Healthcare: Exposure across branded pharma, CDMO, and hospitals; businesses entering an early margin expansion cycle.
• Insurance: Focused on insurers with proven underwriting records and strong structural tailwinds from health.
• Logistics & Ports: Backing a market leader with operating leverage yet to play out.
• Mining & Minerals: Benefitting from long-term underinvestment and pricing support. Our exposure stands at 7.9%, versus 3.7% in the Nifty.

Underweights / Zero Exposure:

• Defence: Despite strong narratives, weak cash flow profiles keep us cautious.
• Hotels & Travel: Valuations have rerated significantly post-COVID, limiting upside.
• Power: We remain watchful given demand cyclicality and NPA risks.
• Telecom: Most of the ARPU-led gains appear to be priced in after a strong four-year cycle.

Sector Deep Dives

• Mining & Minerals: A structural overweight driven by supply-demand mismatches (especially in copper) and lean balance sheets. Our investee companies are allocating capital towards capacity-led growth.
• Lending (Banks & NBFCs): While sector-wide credit growth remains muted and slippages are inching up, our focus is on high-quality lenders with strong NII growth, rising deposit share, and superior CASA ratios.
• FMCG: The runway for price-led growth is limited. Volume growth and execution depth will differentiate winners. Our exposure is centered around market leaders exhibiting strength in rural distribution.

 

Looking Ahead: What We Expect

• Earnings growth is likely to be narrow, favouring growth.
• Private sector capex could pick up pace starting December quarter.
• The 2026 Pay Commission implementation may provide a demand-side boost to consumption.

While market narratives remain compelling in many pockets, Itus continues to position for asymmetric risk-reward and cycle durability. As earnings concentrate and capital costs fall, the next leg of returns will favour companies with fundamental moats and execution strength.