Brokerage firm Kotak Institutional Equities in its latest report said that while the macroeconomic outlook in India has improved, the micro perspective remains muted.
On the microeconomic front, the report predicts moderate earnings growth over FY2024-25 with limited potential for earnings upgrades across sectors, cautioning that downgrades in the consumer discretionary space cannot be ruled out. The underlying factors for the current period of weak demand may persist for another 2-3 quarters, according to the report.
Fourth quarter fiscal year 2023 earnings exceeded Kotak's muted expectations slightly due to a lower-than-expected tax rate for RIL. However, both consumer and IT companies reported weak results, with continued weakness across most consumption categories in the quarter. On the positive side, lending remained robust despite the challenging environment. Outsourcing companies were impacted by a weak global demand environment, the brokerage reported.
The recent macroeconomic improvement, including peaking interest rates and a better external position in terms of the balance of payments, has been well received by the market. The current cycle of interest rates in the country may have peaked, which could address concerns about the negative impact of higher interest rates on housing demand.
The Reserve Bank of India paused its rate hike cycle at its April meeting on expectations of a moderation in inflation. Kotak, however, hopes that this improvement will translate into better microeconomic conditions in the coming months.
Kotak also notes that the Indian market is trading at reasonable valuations compared to recent history, and bond yields have been lacklustre over the past 18-20 months. However, most "growth" stocks, particularly those in the consumption, investment, and outsourcing space, are trading at expensive valuations, despite increasing near-term demand issues and medium-term risks of disruption. In contrast, financials are reasonably valued and appear attractive in the context of a likely healthy credit cycle over the next one-two years.
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