Institutional Equities has ceased to recommend Indian
companies as it finds few stocks, apart from a select few in the financial sector, that have further upward potential following the mid-cap
‘s remarkable surge this year.
The domestically focused mid-cap index has reached numerous all-time highs, posting a 31% gain this year, significantly outperforming the 10% rise in the benchmark Nifty 50 index. This exceptional rally has raised concerns of a potential market correction.
Kotak analysts Sanjeev Prasad, Anindya Bhowmik, and Sunita Baldawa expressed their view in a note, stating, “The primary driver of the rally appears to be irrational exuberance among investors, with high-return expectations being driven by the high returns of the past few months. We see limited point in trying to find fundamental reasons behind the steep increase in stock prices…”
The exuberant market sentiment was attributed to three key factors:
*A substantial surge in the prices of numerous mid and small-cap stocks.
*Significant inflows into mid and small-cap mutual funds.
*A substantial increase in the number of new retail participants in midcap and small-cap funds.
As a result of this rally, most of the 15 stocks in Kotak’s model mid-cap portfolio are currently trading near their fair values for the 12-month period. The brokerage has found limited opportunities for significant upside potential outside of the banking, financial services, and insurance (BFSI) sector, with only five BFSI stocks in the portfolio.
Kotak analysts argue against recommending stocks with low conviction and potential downside to their fair values, citing deteriorating company fundamentals in many cases.
The brokerage also highlighted that institutional investors’ favorites, such as Aditya Birla Fashion, Crompton Greaves, Jubilant FoodWorks, Voltas, TCNS Clothing, Page Industries, and Vedant Fashions, have underperformed due to weak consumer demand.
Furthermore, Kotak raised concerns about the quality of these stocks, given their historical track records of weak execution and governance in the broader “investment” sector, including capital goods, defense, railways, real estate, and renewables.
(With inputs from agencies)