Financial stocks continue to offer value in volatile markets, other sectors still pricey: Kotak's Sanjeev Prasad

Financials attractive, rest of market still expensive, says Kotak’s Prasad

• Financial sector valuations more appealing after selloff
• Consumer and auto sectors still have high trading multiples
• Market correction hasn't created broad buying opportunities yet

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As the West Asia conflict triggered a sharp market selloff, Sanjeev Prasad, Managing Director and Co-Head at Kotak Institutional Equities, believes the financial sector remains one of the few pockets where valuations have turned more attractive.

“The only sector where maybe valuations were okay before the conflict and they have become better during the conflict seems to be the financial space," Prasad told Moneycontrol in an exclusive chat.

From a valuation perspective, he noted that a single quarter typically contributes only a small portion to a company’s fair value. “One quarter really does not contribute much to the fair value of any company, like one to three percent depending on what’s the PE of the company. But obviously the market responds to near-term news and assumes it is going to last in perpetuity, which is where you see dislocation in the stock price. That’s where the opportunity typically comes,” he explained.

For that reason, he believes the sharp correction in financial stocks may present a buying opportunity. “Many of the financial names seem to have sold off aggressively. Nothing really has changed for them. It’s not as if credit growth or asset quality will suffer in perpetuity. So maybe that’s the buying opportunity over there.”

In contrast, he believes several other sectors continue to trade at stretched valuations despite the recent correction. Consumer companies, for instance, still trade at elevated multiples.

“Most of the large-cap or mid-cap consumption names are still trading at very high multiples,” he said, adding that many staple companies continue to trade at 40-60 times earnings despite modest growth. Auto stocks have also corrected, but valuations remain relatively rich. “Most auto companies are still north of 20 times earnings. There is a one-time reset in affordability for autos… but I don’t know whether you will see demand sustaining beyond that high level for the next two or three quarters," he warned.

Similarly, several capital goods companies continue to trade at steep valuations. “Most of the good quality capital goods stocks are north of 40 times earnings,” he said, citing examples such as ABB India and Cummins India, which are trading at elevated multiples.

Technology and pharma companies, meanwhile, have held up relatively well in the recent market volatility.

IT services stocks had already corrected earlier due to concerns around artificial intelligence and long-term growth prospects, while pharma stocks tend to remain resilient during periods of market stress.

As a result, Prasad said the current correction has not yet created a broad-based buying opportunity across the market. According to him, the current environment is far from the deep valuation resets seen during events such as the Global Financial Crisis or the early weeks of the COVID-19 pandemic, when markets offered much stronger entry points for investors.

“It’s better compared to where it was before the Iran-US conflict started a fortnight back, but not to a level where you can see this as a great buying opportunity,” he added.