Hey stock investor, concerned over market valuations? Don't worry, these 3 'Ms' will save you!

With benchmark indices still up 18-20 per cent in the last one year, stock investors are a happy lot.  Kotak Institutional Equities believes its all greed and no fear in the market, at present. It fears that investors are overpaying for weak business models and superficial narratives without due consideration to fundamentals, risks and valuations. It finds financial sector as the only exception with most stocks trading at reasonable valuations.

Indian stocks are richly valued but the true reflection of the overvaluation is hidden, as the valuation is pulled down by high share of absolute and incremental profits of certain low PE sectors such as banks and high share of incremental profits of certain other low PE sectors such as oil, gas & consumable fuels in FY24, the brokerage noted.

"We find most sectors and stocks quite overvalued. The level of overvaluation increases in inverse order of (1) market cap, (2) quality and (3) risk. The market seems happy to overpay for weak business models in a few cases and unsustainably high profitability in others, which highlights high levels of exuberance (only greed) and low concerns about potential risks (no fear)," it said.

That said, Kotak sees 3Ms: macros, mania and Modi (Prime Minister Narendra Modi) to support the market for now.

Bets on PM Modi’s 3^rd  term to support market

Kotak said the large ‘disconnect’ between price and value may sustain, notwithstanding the rich valuations across sectors and stocks if the BJP was to win the forthcoming national elections in May, as is widely expected and the market was to continue to ignore potential medium-term disruption risks.

For now, Kotak does not see any major potential risk to the market that could lead to a sharp correction in the market, thanks to expectations of high returns from the market among domestic retail investors and their related behaviour and low political risks and uncertainty despite general (national) and several state elections over the next few months will likely.

"Also,  India’s reasonable macroeconomic situation (strong GDP growth, manageable BoP, fiscal and inflation); possible weak monsoons from El Nino conditions may further postpone consumption and rural recovery though and (2) a sluggish global outlook (lower inflation and interest rates) should provide some tailwind for the market," it said.

Kotak said the recent December quarter results revealed familiar trends of weak consumption demand for staples and parts of discretionary sectors and strong investment demand, especially for premium real estate.

The dichotomy reflects continued challenges of low-income households (low income, high inflation) and decent financial condition of high-income households, it said.

"We expect consumption demand to recover only gradually over the next 2-4 quarters. The low quality (in terms of value-add) of the bulk of new jobs may pose structural headwinds to a swift revival despite continued strong government and household investment. Certain manufactured exports (bearing, capital goods) declined sharply but we see this as a temporary blip linked to global factors, rather than a reversal of MNCs’ offshoring plans for India," it said.

 

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