Recent market rally a mix of sentiment & fundamentals, but lacks value in most sectors: Kotak analysts

Kotak analysts said that they would not rule out further earnings downgrades over the next few months

Indian equity benchmarks have maintained a seven-day winning streak, recovering 6 percent over this period. Analysts at Kotak Institutional Equities describe the rally as a blend of fundamentals and sentiment but remain cautious, noting that they do not see value in most parts of the market. They also caution that earnings downgrades could be on the horizon in the coming months.

This recent uptrend appears to be fueled by a mix of factors, analysts wrote. Some investors may have identified value in BFSI stocks, while others have turned to 'narrative' stocks that have regained appeal after months of correction.

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Additionally, the slowdown in foreign portfolio investor (FPI) selling over the past month—coupled with fresh inflows in the past week—has offered further support. The possibility that FPIs are returning to emerging markets following the underwhelming performance of the ‘Trump trade’ has also played a role.

Despite this broad-based rally, Kotak analysts expressed difficulty in finding value beyond select segments.

Among the notable contributors, the BFSI sector has been instrumental in driving large-cap gains, despite persistent concerns regarding a moderation in credit growth, compression in net interest margins (NIMs), and rising credit costs.

Meanwhile, ‘narrative’ stocks have staged a strong recovery after experiencing sharp corrections over the past six to nine months. These stocks have been key drivers of the mid- and small-cap rebounds.

However, Kotak analysts remain cautious, reiterating that they would not rule out further earnings downgrades over the next few months. They forecast net profit growth for the Nifty-50 index at 13.2 percent in FY26 and 14.4 percent in FY27.

In light of these market dynamics, Kotak introduced minor adjustments to its recommended portfolio. Dr Lal PathLabs has been added, while weightings have been reduced for Indigo Aviation (lowered by 40 basis points to 150 bps) and Zomato (cut by 110 basis points to 150 bps).

Analysts highlighted that Dr Lal is currently trading at 41x its estimated FY26 earnings per share (EPS), a valuation that they consider reasonable given its strong revenue and earnings growth prospects.

At the same time, Kotak has scaled back exposure to discretionary consumption plays like IndiGo and Zomato, citing emerging concerns over a potential slowdown in high-end consumer spending. Additionally, intensifying competition in the quick commerce space presents a sector-specific challenge for Zomato.

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