Kotak Institutional Equities’ head Sanjeev Prasad has called out irrationally high valuations in the Indian stock market, saying that the reason for the broad based market rally is not clear. “The broad-based rally across sectors and stocks in the past few weeks has resulted in rich valuations for the consumption and investment sectors versus history,” Sanjeev Prasad and other analysts said in a research note. It detailed the struggle to find investment ideas or themes in previously favoured sectors, such as consumption, investment, and outsourcing. Further, the broader markets’ outperformance over the benchmark indices has baffled the brokerage house.
12-m rolling forward PE of Nifty-50 Index, March fiscal year-ends, 2001-24 (X):
Mid-caps, small-caps on their own tangent
“We do not see any particular reason for the excitement in mid-cap and small-cap stocks,” said the report, as large-cap companies have been outperformed by their smaller peers over the last 2-3 months. While sectoral re-rating, especially in the healthcare, real estate, and BFSI sectors is understandable, the rally in smaller consumption and IT services stocks, on the continued weak domestic and global demand is a “struggle to understand”.
Performance of major Indian stock market indices (%):
BFSI: The only pocket of value
The only pocket of value is the BFSI sector, although the past few sessions have seen insurance stocks rise sharply. India’s continued weak consumption demand for small companies should be negative instead, said the report, whereas falling inflation and moderating CAD should have acted as a tailwind for large-caps’ performance, based on a better top-down view of India among foreign investors. This is reflected in large passive FPI flows, however, despite the foreign funds, Indian markets have lagged most DMs and several EMs.
Stock Outlook
Following Britannia Industries, GCPL, and Titan’s strong performances, KIE reduced the weightage of consumer sector stocks. The three companies rallied 14%, 6%, and 13% respectively over the past two months and trade around 12-month fair values of Rs 4,950, Rs 1,100 and Rs 2,970. Kotak Institutional Equities also trimmed its positions in banks and NBFCs, while adding InterGlobe Aviation to its recommended large-cap model portfolio.