In a recent strategy report Kotak Institutional Equities, it is suggested that the recent correction in stock prices may not be the end of the downward trend for mid and small cap stocks. The report emphasizes that while there has been a meaningful price correction in Indian equities, the degree of correction has varied across market caps and sectors.
The correction in mid and small cap stocks is relatively small compared to the rally they have experienced in recent months. Kotak’s analysis indicates that most mid and small cap stocks do not offer value, considering the extent of rerating in multiples seen in the past year. The report states that despite weakening business models and eroding business moats, these stocks have seen significant rerating in multiples.
On the other hand, large-cap stocks are seen as offering a better reward-risk balance, as they have more reasonable valuations compared to the lofty valuations of most mid and small cap stocks. The Nifty50 Index, for example, has more reasonable valuations at 17.5 times FY2025E earnings per share (EPS), considering the moderate earnings growth and muted performance of the broader market in recent years.
The report also raises concerns in the consumption sector, where rich valuations do not take into account weak demand in the near term and weakening business models in the medium term. Weak volume growth in 2QFY24 and overall weakness in consumption are attributed to weak growth in quality jobs and high inflation in consumer products.
In the investment sector, stocks have performed well on expectations of a strong recovery in the domestic capex cycle. However, the report highlights two risks in this narrative. Firstly, there is a possibility of front-loading of government capex in FY2024, which may not be sustainable in the long run. Secondly, financing capital expenditure through large fiscal deficits may pose sustainability concerns.
The report also provides insights into the 2QFY24 results, which have been broadly in line with expectations on an aggregate basis. However, there has been wide dispersion in reported performance versus expectations, with banks outperforming while companies in the auto, construction materials, metals, and IT services sectors have missed estimates.
Based on their analysis, Kotak has made minor changes to their recommended large-cap portfolio. SRF has been removed from the model portfolio due to near-term downside risks, while the weight has been reallocated to HDFC Bank, ICICI Bank, and RIL. The report advises caution in stock selection and portfolio allocation.
Overall, the report suggests that large-cap stocks offer a better reward-risk balance, while mid and small cap stocks face continued downward pressure. It highlights concerns in the consumption and investment sectors, emphasizing the need for careful stock selection and portfolio allocation.
Source: Orion – https://www.businessinsider.in/stock-market/markets/news/rollovers-and-november-series-of-nifty-futures-provides-a-clear-roadmap-for-investors/articleshow/104744187.cms