In recent months, the Indian market has become more and more hot as strong performance across a range of sizes and industries has driven stock prices higher. Domestic brokerage Kotak Institutional Equities noted in its most recent research that a robust macroeconomic environment, positive earnings outlook, and ebullient attitude among non-institutional investors—who tend to be less price-sensitive—are the main drivers of these high valuations.
In light of this, the brokerage stated that the Indian market now provides little value in terms of stocks and sectors. It divided the market into three valuation categories: full, frothy, and sectors trading at fair pricing.
Only the banking industry and a few equities from other industries were found by the brokerage to be trading at “fair” valuations. It stated that although life insurance businesses have managed to hold onto their gains over the last few weeks, banks have recently lost some of their advantages.
Bank valuations are currently at appropriate levels, according to the brokerage. It did, however, rule out any meaningful rerating in bank multiples because of obstacles such as reduced net interest margins (NIMs) and the possibility of increased credit costs as a result of growing delinquencies in specific unsecured personal loan categories.
Notwithstanding these difficulties, the brokerage does not anticipate any unfavourable events that would cause bank multiples to significantly depreciate. Public sector undertakings (PSUs) and microfinance institutions (MFIs) have already seen some derating throughout the previous month, mostly as a result of worries about rising loan costs.
Sectors and stocks trading at ‘full’ valuations
The firm identified industries trading at “full” valuations, including pharmaceuticals, IT services, healthcare, and consumer staples. It was mentioned that, for a variety of reasons, the majority of equities in these sectors have seen a considerable rerating in recent weeks.
The brokerage claims that consumer staple stocks have meaningfully declined on expectations of a rebound in volumes as low-income households’ affordability improves over the next few quarters. This would reverse the trend of steep product price increases and modest household income growth experienced by low-income households over the previous four to five years.
Anticipations of a volume rebound have also contributed to a similar rating in IT services equities. The Q1 FY25 figures, however, did not offer compelling proof of an impending underlying demand recovery.
Sectors and stocks trading at ‘frothy’ valuations
Investment-related industries and PSUs were categorized by the brokerage as trading at “frothy” prices. The market’s assumption of a persistently robust investment cycle has caused the multiples for these industries to rocket to unprecedented heights.
Faith in various “narratives” surrounding PSU equities, which we find difficult to understand in light of the astounding revenue and profit levels needed to support the majority of PSUs’ current market capitalizations, the statement said.
“We are reluctant to use the valuations of major benchmark indices to get a handle on the market’s valuations (undervaluation or overvaluation) in the context of the exuberant behaviour of a section of market participants, which attaches very little importance to valuations anyway, huge divergence in the performance of different parts of the market and wide dispersion in multiples across sectors and within sectors,” said Kotak Institutional.
