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Informist, Tuesday, Feb. 18, 2025

 

MUMBAI – Most sectors and stocks are trading at rich valuations, with the extent of overvaluation rising in inverse correlation to market capitalisation, quality and risk, Kotak Institutional Equities said in its strategy report. "We do not find much value in most parts of the market despite the recent sharp correction in the market," it said in the report. The broking firm expects the domestic market to remain lacklustre due to expensive valuations across sectors, potential earnings downgrades, and higher-for-longer interest rates on the global front, adding that the December quarter earnings growth 'did little' to change its cautious view of the market.

 

The net income of companies which are part of the Nifty 50 index grew 8.8%, slightly ahead Kotak's estimate of 7.8%. However, the net income of all companies under its coverage was lower than expected at 8.2% compared to 9.2% increase projected. The broking house said that the weak operating results highlighted some of its long-standing concerns around the Street's optimistic profitability and volume assumptions. Kotak expects the net profit of the Nifty 50 universe to grow 4.4% in the current financial year and 15% in the next fiscal.

 

The Nifty 50 and Sensex have fallen around 11?ch since October, due to the recurring foreign outflows, expensive valuations, disappointing earnings growth, fears of slowdown in interest rate cuts by the US Federal Reserve this year, worries of spike in US inflation, depreciation of the rupee, and tariff threats from the US administration. Both benchmark indices closed slightly lower Tuesday after they snapped an eight-day losing streak Monday. The Nifty 50, Nifty Midcap 100, and Nifty Smallcap 100 index have given negative returns in the last six months, the broking firm said.

 

Kotak Equities also does not expect any respite from the selling pressure of foreign investors, who have been net sellers in the market and have been increasing their short positions. Foreign portfolio investors are likely to continue with their cautious stance due to the challenging investment environment for emerging markets. The brokerage firm also said that India's macroeconomic position has deteriorated somewhat in the last few months and that a period of low trailing returns could dampen return expectations among retail investors and inflows to domestic mutual funds.

 

However, the long-term growth expectations paint a better picture. The broking firm said that India's decent macroeconomic position and reasonable earnings outlook for 2025-26 (Apr-Mar) are the positive that will likely sustain investors' interest. "As such, we would rule out a major correction in the market (headline large-cap indices), barring negative geopolitical or other catastrophes," it said. But, a further correction in mid- and small-cap indices and narrative stocks are anticipated, given a 'dangerous combination' of rich valuations and weak fundamentals in many cases. 

 

Kotak Equities also expect a more benign inflation outlook for FY26, with average CPI inflation at 4.2% compared to 4.8% in FY25. "We assume moderate domestic food inflation and steady global commodity prices. We expect the RBI to cut policy rates by an additional 25-50 bps (basis points) through FY26, assuming CPI inflation was to broadly follow the RBI's expectations," it said in the report. The broking firm also notes that India's inflation has been and may be volatile due to high volatility in food inflation prices due to seasonal factors and growing disruptions to food production and supply from erratic weather conditions. 

 

High inflation has been causing troubles for India as well as the US, which has pushed the central banks of both the countries to keep their interest rates at elevated levels for longer. These had hit the financial performance of almost all the sectors, including banks, automobile, information technology, and fast-moving consumer goods. However, these apex banks have started their rate cut cycle, providing relief for companies as well as investors.  End

 

Reported by Anjana Therese Antony

Edited by Ashish Shirke

 

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