Is market correction on the horizon amid high valuations?
Domestic brokerage firm Kotak Institutional Equities suggests that there are no immediate negative factors that could prompt a significant correction in the market. However, it highlights overvaluation in the majority of sectors and stocks, with the market willing to overpay for weak business models
Indian markets have been on an upward trajectory since May 2023 (leaving minor setbacks aside), particularly evident in the substantial rally witnessed in mid-and small-cap stocks. Many of these stocks have delivered exceptional returns, significantly multiplying investors' wealth within a short timeframe.
However, this sharp rally has resulted in the majority of these stocks trading at expensive valuations, raising concerns among investors about a potential market downturn. Despite these concerns, recent projections from domestic brokerage firm Kotak Institutional Equities suggest that there are no immediate negative factors on the horizon that could prompt a significant correction in the market.
Also Read: Nifty 50, Sensex rise over 1% this week as focus shifts to fundamentals; Wipro, M&M, SBI shine
The brokerage highlighted that the majority of sectors and stocks are overvalued. This overvaluation varies, with most large-cap consumers, IT services, and pharmaceuticals showing relatively low levels, the investment space displaying medium levels, and several low-quality companies reflecting high levels of overvaluation.
The brokerage believes that the market is willing to overpay for weak business models and superficial narratives without considering fundamentals, risks, and valuations. The financial sector is the only exception, with most stocks trading at reasonable valuations among the larger sectors.
Macro, mania and Modi may support the market though
The brokerage said that the large 'disconnect' between price and value may continue to persist if the BJP wins the upcoming national elections in May, as expected, and the market continues to ignore potential medium-term disruption risks.
Additionally, the brokerage pointed out that India's macroeconomic situation is characterised by strong GDP growth and manageable fiscal and inflation levels. The brokerage sees sluggish global economic activity in CY2024, which it views as a favourable macroeconomic environment for India, stemming from potential interest rate cuts by developed market central banks and moderate global crude oil prices.
However, it said that weak global economic activity may impact India’s exports, and a sharper-than-expected slowdown in the US could hinder the recovery of revenues for IT services companies. Additionally, the brokerage cautioned that possible weak monsoons due to El Nino conditions could delay consumption and rural recovery.
Consumption is struggling, investment is booming
The December quarter numbers (Q3FY24) showed the familiar trends of weak consumption demand for staples and parts of discretionary sectors and strong investment demand, especially for premium real estate. The dichotomy reflects the continued challenges of low-income households (low income, high inflation) and the decent financial condition of high-income households.
Kotak predicts a gradual recovery in consumption demand over the next 2–4 quarters. However, the predominance of low-quality jobs with limited value addition may present structural obstacles to a rapid revival, despite sustained government and household investment, it said.
Certain manufactured exports (bearing, capital goods) declined sharply, but brokerage sees this as a temporary blip linked to global factors rather than a reversal of MNCs’ offshoring plans for India.
Healthy performance
In 3QFY24, the net income of the Nifty 50 Index saw a year-on-year increase of 13.8%, surpassing brokerage expectations of 12.8% growth. EBITDA also experienced a 10.1% year-on-year increase, exceeding brokerage expectations by 1.6%. Net profits across the brokerage universe rose by 26% year-on-year, outperforming expectations of a 21% increase. The metals & mining and oil, gas & consumable fuels sectors notably exceeded expectations for net income.
However, weak results from SBI were a drag on overall performance. Despite this, most sectors witnessed a decent year-on-year increase in net income, driven by improved profitability, which offset muted volume growth, the brokerage stated.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.
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