Indian Market Richly Valued; Enter 2024 With Low Return Expectations – Kotak

Kotak Securities said the Indian market is richly valued both on a top-down and bottom-up basis and it would be best to enter 2024 with low return expectations from the stock market.

“2024 may be tricky for investing given the conflict between fundamentals (value) and sentiment (price),” Kotak said in an investor note. “The year could finally see a convergence between price and value or a continued large disconnect between price and value, the case for the past six-to-nine months.”

The brokerage said high ‘absolute’ valuations should logically drive convergence over time, while ‘positive’ incremental news (already discounted though) may sustain divergence with sentiment overpowering fundamentals.

LITTLE VALUE IN MOST PARTS OF MARKET

Kotak said it finds very little value in most parts of the market after the recent run-up in mega-cap stocks, the last bastion of value in the market until recently.

The brokerage noted that it has been quite cautious on the mid-cap and small-cap stocks for the past three-to-four months and positive on the large-cap and mega-cap names.

Kotak, however, said incremental news will likely be positive and may sustain market exuberance and frothy valuations.

WHAT COULD SUSTAIN PRICE-VALUE GAP?

India’s decent macro-economic fundamentals, strong expectations of lower global interest rates on the back of declining headline and core inflation in major economies and reduced election risk after the Bharatiya Janata Party’s (BJP) strong performance in recent state elections may sustain the Indian market’s rich valuations, according to Kotak.

The brokerage said the market may conveniently ignore the fact that valuations of most stocks are well above their pre-pandemic levels when:

• Interest rates will likely be higher versus pre-pandemic levels even after potential rate cuts in 2024-25,

• Global growth rates will be lower and weigh on certain export-oriented sectors,

• Fundamentals of several sectors and companies will weaken, especially in the consumption-related sectors, and

• Excess industrial capacity in China may act as a limiting factor on the prices of commodities.

LIMITED SCOPE FOR POSITIVE SURPRISE

The brokerage said the recent upgrade in FY24E EPS of Nifty 50 Index has been primarily driven by the oil marketing companies. It expects the net profits of the Nifty 50 Index to grow 18% in FY24 and 11% in FY25.

“We see limited scope for earnings upgrades in the context of our benign profitability and volume assumptions across sectors,” Kotak noted.

PREFERRED STOCKS

Kotak said it prefers stocks with compounding in earnings/book and lower risks of de-rating in multiples.

Following are the stocks in the brokerage’s large-cap model portfolio:

• Automobiles & Components: Mahindra & Mahindra

• Banks: Axis Bank, Canara Bank, HDFC Bank, ICICI Bank, IndusInd Bank and State Bank of India

• Capital Goods: Cummins India and Larsen & Toubro

• Consumer Staples: Britannia Industries, Colgate-Palmolive (India), Dabur India, Godrej Consumer Products, Hindustan Unilever and United Spirits

• Diversified Financials: Shriram Finance

• Electric Utilities: Power Grid

• Healthcare Services: Apollo Hospitals

• Insurance: ICICI Prudential Life and SBI Life Insurance

• Internet Software & Services: Zomato

• IT Services: HCL Technologies, Infosys, Tata Consultancy Services and Tech Mahindra

• Oil, Gas & Consumable Fuels: Reliance Industries

• Pharmaceuticals: Cipla, Mankind Pharma and Sun Pharmaceuticals

• Real Estate: DLF, Embassy Office Parks REIT and Macrotech Developers

• Telecommunication Services: Bharti Airtel

• Transportation: Adani Ports & Special Economic Zone and InterGlobe Aviation

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