Kotak Institutional Equities remains cautious on Indian markets despite decline in October; here’s why

Indian markets witnessed a significant reversal in October after nine months of continuous rally that had left them among the most expensive in terms of valuations globally. This change was highlighted by foreign portfolio investors (FPIs) Extracting record amounts of Rs 82,479 crore from Indian equities so far in October,

Analysts have been warning about the unsustainable valuations of Indian stocks, suggesting that a correction is imminent. They point out that the market has not seen any major fluctuations since the COVID-19 pandemic, which raises concerns about potential weaknesses.

Amid this backdrop, both Nifty 50 and Sensex have fallen by more than 4% so far in October. From their respective peaks, both the indices have fallen by about 6%. Despite this significant improvement, domestic brokerage firm Kotak Institutional Equities says current valuations remain unattractive.

In its recent note, the brokerage firm expressed concern about the current state of market valuations, stating that they are too high in most sectors. It was emphasized that Multiplier for almost all sectors except banks– are well above their pre-pandemic levels.

This elevated valuation remains despite several factors, including lower growth rates across most sectors (except investment stocks) compared to pre-pandemic levels, stagnant costs of equity based on 10-year bond yields in India, and weak growth across various industries. The risk of disruption has increased. ,

“Despite the recent correction in the market (modest in large-cap stocks and major in some mid-cap and small-cap stocks), there is no change in our cautious view on the market,” the brokerage said.

It added that most sectors of the market continue to trade at full-to-frothy valuations, indicating a lack of real value when assessed through traditional metrics. The brokerage explained that this lack of value is not only due to unrealistic growth and profitability assumptions – which are often retracted from the latest stock prices – but also because when all the stocks in a sector are trading at inflated prices So relative evaluation becomes meaningless.

“Finally, it remains to be seen how long retail investors remain skeptical about prices and valuations and continue to bid/buy shares at all price levels, as they have done in the last 15-18 months. The recent sharp correction in some ‘story’ sectors and stocks has brought a much-needed dose of realism to a section of investors, however, the overall market sentiment is still quite bullish,” the brokerage said.

2QFY25 results: Nothing much to celebrate

The brokerage has analyzed 2QFY25 results so far and suggested a broad slowdown in the Indian economy. Many companies have disappointed against modest expectations with respect to net sales, EBITDA and net profit.

It said consumer companies reported a weak print, suggesting a challenging demand environment. IT companies have reported unexpected figures and their comments suggest that there will be a gradual recovery going forward. Banks have performed quite well with moderate loan growth (YoY) and stable NIM and asset quality (QoQ).

It also highlighted that sustained price hikes implemented by various companies have reduced domestic affordability and intensified competition from unorganized players. Retailers like DMart and Reliance Retail reported slow numbersIn view of the tough competition from new entrants.

The unexpected success and rise of brands like Zoodio/Trent in apparel instant commerce Underlines the risks of disruption to domestic products, even for established players who now face new threats.

Furthermore, the brokerage observed that consumer-facing companies are struggling to maintain their elevated margins, with both automobile and consumer companies facing margin compression along with volume challenges.

Both automobile and consumer companies have made large price increases over the past 3–5 years, and consumer staples companies have vacated lower price points, resulting in a segment of consumers declining due to affordability issues and Regional players have occupied vacant or vacant positions. , it said.

Kotak Institutional Equities cautions that significant downside risks exist for these companies with respect to increased profitability assumptions.

Disclaimer, The views and recommendations expressed in this article are those of the individual analysts. These do not represent the views of the Mint. We advise investors to check with certified experts before taking any investment decision.