Valuations of the markets (Nifty-50) and some sectors have become more palatable after the recent corrections, Kotak Institutional Equities said in a report on Monday. However, valuations are still not attractive except for a few sectors such as financials and telecom, especially in the context of risks – ‘higher-for-longer’ inflation related to domestic food and global fuel prices, and secondly, unknown response of domestic retail investors related to weaker ‘reward-risk’ balance for equities in relation to other assets, the report said.
“Market valuations appear more reasonable versus recent history after the sharp corrections over the past two months. The gap between earnings yield and bond yield has narrowed despite the recent increase in bond yields. However, we see upside risks to inflation and interest rates. We note that our projected inflation trajectory has moved higher, with average CPI for FY2023E being between 6.7% and 7.1%. ‘Higher-for-longer’ inflation will keep interest rates elevated and act as a headwind to market multiples,” the Kotak report said.
Valuation of financials stocks has been attractive in general. Valuations of ‘growth’ stocks in the IT services and pharmaceuticals sectors appear more reasonable after corrections and most ‘value’ stocks continue to trade at inexpensive multiples. However, valuations of most ‘growth’ stocks in consumption sectors are still expensive, it said.
According to Kotak, companies reported decent earnings in the fourth quarter of the previous fiscal, with aggregate net profits broadly in line with its estimates. “Our Nifty-50 EPS estimates have seen modest upgrades over the past two months. We note that banks, diversified financials, oil, gas & consumable fuels and telecom contribute 75% of incremental profits of Nifty-50 in FY2023, and have low downside risks to earnings. Automobiles may impact our overall net profit estimates on global growth risks.”
The report said retail investors have been steadfast in their equity investments over the past few months despite negative returns over trailing one, three and six months. Trailing 12-month returns will also become negative over the next few months even if the market was to stay flat.