Indian stock market lacks value despite crash; the era of narrative stocks near its end, says Kotak Securities

Indian stock market has seen sharp correction from its peak levels scaled in September 2024 which has brought the valuation of several stocks and sectors significantly lower. However, despite the recent sharp decline, brokerage firm Kotak Securities believes the Indian stock market lacks value at the current juncture, while the discussions about investment flows have failed to predict market peaks or corrections.

"We do not find value in most parts of the market despite the sharp correction across sectors and stocks. Flows have seen endless discussion among market participants but have proven (again) to be pointless in assessing the market peak or correction," Kotak said.

The market benchmark Nifty 50 has plunged nearly 16 per cent from its peak of 26,277 which it hit on September 27, 2024. On a monthly scale, the index has been down since October.

Most of this decline has occurred in the wake of massive foreign capital outflows. Since last October, foreign institutional investors (FIIs) have sold Indian equities worth over ₹3 lakh crore in the cash segment.

The stretched valuations of the Indian stock market, attractive valuations in China and Japan, weak earnings of India Inc., signs of economic growth losing momentum, a depreciating rupee, a strengthening dollar, elevated US bond yields, and concerns over a major trade war are the key factors driving FIIs away from Indian markets.

No value in the Indian stock market?

Brokerage firm Kotak argues that most parts of the domestic market are expensive on an absolute basis or on a historical basis.

"Consumption stocks are trading at full-to-frothy valuations, especially in the context of short-term growth issues and medium-term disruption risks. Investment stocks are trading at fair-to-full valuations, and outsourcing stocks are trading at fair-to-full valuations, especially in the context of short-term demand (IT services) and market (pharmaceuticals) risks," Kotak said.

"Only the banks and NBFCs seem to be reasonably valued. Headline market (Nifty 50 index) valuations are misleading, given the wide disparity in valuations and a large share of profits of low P/E sectors," the brokerage firm added.

The brokerage firm also pointed out that the narrative of a strong inflow of domestic retail money has also not helped the market.

"We see investors focusing excessively on retail inflows into domestic mutual funds, but not enough on business models and valuations of companies. Flows have proven (again) to be absolutely useless in figuring out the peak of the market and the subsequent correction, and they will prove useless in predicting the market bottom," Kotak said.

"A few basic facts about the market remain underappreciated: (1) there is no money in the secondary market; somebody buys, somebody sells at all prices; (2) expectations of returns influence the action of buying (inflows) or selling (outflows) of an investor and (3) the price of a stock is the clearing price based on the expectations of all market participants," said Kotak.

Is the era of narrative stocks over?

Expressing caution about ‘narrative’ stocks from sectors such as defence, railways, etc., the brokerage firm highlighted that many such stocks are trading at unfathomable valuations despite the 30-50 per cent correction in their stock prices in the past few months.

The brokerage firm believes investors waiting for a revival in these narrative stocks may be in for a rude shock.

"Investors waiting for a revival in ‘narratives’ and a rebound in ‘narrative’ stocks may want to note the following: (1) the cat may be already dead, (2) the cat will likely be dead if it is dropped from a sufficient height (despite a cat’s fabled nine lives) and (3) the image will be too ghastly to imagine," said Kotak.

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