Kotak Securities predicts more consolidation in market on high valuations

markets

Kotak Securities has advised investors that market consolidation is expected to persist because of high valuations, and any correction should be used as an opportunity to invest in quality stocks for the long term.

India's robust economic and earnings recovery, along with increased capital expenditure (including the PLI scheme), is likely to keep the Indian markets attractive in the medium to long term. As the festive season nears, discretionary sectors and stocks may garner attention from investors. The Indian market is expected to align with global market trends, the Kotak report said.

It said high valuations across sectors account for volume and profitability recovery but do not consider the risks. The first quarter of FY24 results revealed weak consumption demand and anticipated outsourcing (IT services) demand decline, but improved profitability. Despite this, a reasonable macroeconomic outlook, ongoing expectations of recovery in profitability and volumes, and a strong medium-term narrative for India support the markets, the report said.

"We see limited money-making opportunities in the market given expensive valuations and potential disruption risks across sectors, which may result in lower profitability and multiples over time," said the Kotak Securities note.

After a decent 11.1 percent earnings growth in FY23, Kotak expects net profits of the Nifty 50 Index to grow by 15.8 percent (EPS of Rs 943) in FY24 and by 13 percent (EPS of Rs 1,078) in FY25. At 19,255 points, the Nifty traded at 19.4x FY24 and at 16.9x FY25.

Kotak anticipates that in FY24, the automobile sector and BPCL will significantly influence overall net profits, potentially contributing up to 14 percent of the Nifty50 Index's incremental profits. Conversely, banks are expected to have a smaller share of incremental profits, primarily due to the assumption of declining NIMs. FY25 is expected to witness more evenly distributed growth across sectors.