Indian frontline indices have experienced a notable correction from their recent highs, with the broader market also witnessing a sizable decline from its peaks. This has fueled expectations that the correction might have brought stock valuations to more reasonable levels, as they have been trading at elevated levels for quite some time.
However, domestic brokerage firm Kotak Institutional Equities asserts that the recent correction has not created any meaningful investment opportunities in the market. It highlights that the disconnect between price and value remains significant across most sectors and stocks.
“We do not find many new worthwhile opportunities despite the sharp correction in many stocks over the past 3-6 months. The Nifty-50 index, Nifty Midcap 100 index, and Nifty Smallcap 100 index have fallen by 7%, 6%, and 4% from their peak levels and by 4%, 4%, and 2%, respectively, in the past three months,” said Kotak.
The report noted that the largest corrections have occurred in two broad categories of stocks: consumption-related sectors, where earnings downgrades have kept valuations elevated, and ‘narrative’ sectors, where valuations have shifted from being extremely frothy to merely frothy.
In the consumption category, many stocks across market caps and sectors have seen sharp corrections over the past two to three months. However, downgrades to FY2025E and FY2026E consensus EBITDA and EPS estimates have resulted in valuations remaining high, particularly for large-cap and mid-cap consumption stocks.
The sustained rich valuations suggest that the market is optimistic about a recovery in earnings in FY2026-27E and remains confident about the medium-term prospects of these companies despite growing evidence of potential disruptions to business models, it noted.
For ‘narrative’ stocks, which span various market caps and sectors, the market has begun to question the narratives underpinning their valuations. These stocks have also witnessed sharp corrections over the past three to six months, although downgrades to FY2025E and FY2026E consensus EBITDA and EPS estimates have been limited.
Despite this, the brokerage highlights that valuations in these sectors remain frothy or excessively high. It further notes a significant potential downside to the 12-month fair values of the covered stocks and expresses puzzlement over the frothy valuations of several non-covered stocks.
Long way to go, given the large gap between price and value
The brokerage does not find much value in most parts of the market, as the valuations of most sectors and stocks remain at fair, full, or frothy levels. It categorises most investment stocks as being in the full-to-frothy range, outsourcing stocks in the fair-to-full range, and financials in the reasonable-to-fair range.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
