The recent rally in the Indian equity markets has pushed the valuations higher as rapid appreciation in prices of several stocks has reduced the appeal of the Indian markets. According to Kotak Investment Banking, it has now become difficult to find ideas with decent absolute upside without looking at FY2019.
In a research report the investment bank said, the Street is confident about government’s reforms and earnings recovery as the domestic economy is expected to pick up post good monsoons and after the seventh pay commission payouts. “FY2018E earnings are largely predicated on strong domestic and moderate global economic recovery and they matter more since the Street is already focusing on FY2018 earnings,” Kotak said.
However on the downside, the earnings in certain sectors could be effected due to “Brexit”and global factors including concerns about China. “Global currency and equity markets are hopeful about China’s growth and debt issues and seem to have enough faith in the ability of the Chinese government to manage its economic challenges. The Chinese economy is showing signs of slow deterioration but the government is using its economic might to engineer a ‘planned’ slowdown. Any loss of this ‘faith’ or depreciation in the CNY may hurt sentiments for emerging markets significantly,” the report said.
Talking about Non Banking Financial Companies(NBFCs), Kotak said it was astounded by the huge surge in stock prices of NBFCs as until two months ago, most investors had expressed concerns over the long term business models and NPLs. Even as the NPL situation has improved, the investment case of lower borrowing costs through lower interest rate has weakened over this period given higher-than-expected inflation and growing consensus,”the investment bank said.