Markets may stay stuck in a range as valuations run ahead of fundamentals: Kotak Institutional Equities

Indian equity markets may remain “stuck” in a range over the next few months, weighed down by expensive valuations and the lack of strong earnings triggers, according to Kotak Institutional Equities’ latest strategy note.

The market remains “blissfully ignorant” of the reality of a sluggish domestic outlook, a slowdown in consumption and investment demand, challenged global macros, and high inflation, said Sanjeev Prasad, MD and Co-Head at Kotak Institutional Equities in a report.

While the March-quarter results came in slightly above expectations – Nifty 50 net profit rose 3.7 per cent year-on-year and was 3.8 per cent ahead of Kotak’s estimates – the brokerage believes the beat was marginal and concentrated in a few sectors.

Most companies except banks, and downstream oil marketing companies reported steady but unremarkable performances, with muted revenue growth and margin pressures continuing in several sectors.

“The Indian market seems to be stuck between the harsh realities of stiff valuations, domestic growth issues and global macroeconomic headwinds, and the hopes of a recovery in the economy and earnings,” said Prasad, adding that March quarter results also did not provide much comfort about an imminent recovery.

Valuation premium

The Nifty-50 trades at a forward price-to-earnings (P/E) multiple of 24.4 times FY 2025 earnings estimates, and even factoring in projected earnings growth of 12% and 15% for FY2026 and FY2027, valuations only ease to 21.9x and 19.0x respectively.

Kotak considers these levels “above fair value” given the current macroeconomic and earnings backdrop.

While large cap stocks may find some support from the continued optimism among investors about India’s long-term growth prospects and lower interest rates. Small and mid-cap stocks still have a long way to go to correct their fair values.

Mid and small continue to trade at a large premium to large caps despite many meaningful earnings downgrades, which suggests the market does not care about valuations and/or the market does not care about earnings, Kotak said.

“This nonchalant attitude perhaps reflects the market’s confidence in retail investors sustaining their hitherto price-agnostic purchase of stocks through mutual funds and FPIs staying positive on Indian equities based on a ‘narrative’ of a lack of alternatives in EMs,” it said.

The market has gone from despair to relief to euphoria in about 5-6 weeks tracking the changes in the US’ import tariff policy. Insiders have used the recent rally to sell down their holdings significantly with promoters of at least 10 large and medium-size companies selling down a part of their holding in the past fortnight alone.

In any case, the Indian market has been a laggard in the recent global rally, which should dampen narratives about “Indian exceptionalism”, Kotak said. It sees short-term growth and profitability challenges in several parts of the market, especially consumption, parts of investment, and outsourcing (IT services), as well as medium-term growth and profitability issues in several sectors.

Published on June 3, 2025