Informist, Friday, Sep 22, 2023

MUMBAI – The domestic equity market is facing fresh headwinds from higher interest rate for a prolonged period in the US and other countries, weaker-than-expected domestic macroeconomic conditions, and re-emerging pressures on companies' profitability, brokerage Kotak Institutional Equities said in a strategy report on Thursday.

The continuance of elevated interest rates "may provide headwinds to recovery in IT (information technology) sector revenues... (and) weaker-than-assumed tax collections and CAD (current account deficit) may limit the flexibility of the government to support the economy," the brokerage said in the report.

Higher oil prices around the world may reverse some of the sharp recovery in companies' profitability seen over Oct-Jun, it added. The oil price rise relates to the hardening in raw material prices for sectors such as automobile and components, construction materials, and commodity chemicals sectors, the report said.

"These companies had seen a very sharp expansion in their profitability over the past few quarters...(which) drove their valuations to unrealistic levels," it said. "We are not sure if the companies can raise prices to pass on the increase in RM (raw material) prices to customers given muted demand conditions," it added.

The brokerage said in the report that there was a lower scope for fiscal-related boost to consumption. "We are increasingly less hopeful of increased spending by the government to combat the continued weak spell in the Indian economy, especially in consumption from rural and low-income urban households," the report said.

The government which is already spending aggressively on capital expenditure may, however, be cramped to increase revenue expenditure due to lower-than-expected corporate tax collections, and higher-than-expected losses of public sector oil marketing companies, it added. "We project OMCs (oil marketing companies) to incur under-recoveries of Rs 200 bn (200 bln rupees)" in 2023-24 (Apr-Mar).

These new headwinds will add to the old ones, according to the brokerage.  End

Edited by Akul Nishant Akhoury

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