However, as investors are happy to overpay for weak business models in a few cases and unsustainably high profitability in others, there is only greed and no fear left in the market, said Sanjeev Prasad of Kotak Equities.
“We find most sectors and stocks quite overvalued with the degree of
overvaluation ranging from low for most largecap consumer, IT services and pharmaceuticals to medium in the investment space to high in the case of several low-quality companies,” he said, adding that among the larger sectors, the financial sector is the only exception with most stocks trading at reasonable valuations.
The December quarter earnings season was modestly ahead of expectations as Nifty profit rose 13.8% YoY.
“Higher-than-expected profits of the oil PSUs (downstream companies) were offset by one-off provisions of SBI. We expect net profits of the Nifty50 index to grow 18.9% in FY2024 and 10.2% in FY2025,” Prasad said.
Valuation worries
Kotak said it finds most sectors and stocks quite overvalued in the context of historical valuations coupled with the Street’s high assumptions for profitability in the short term, which may not sustain and weak business models and/or emerging risks to even hitherto strong business models in the medium term.Also Read | Warning signs flash for over 100 smallcap multibaggers. Is it a bubble waiting to burst?
“We note large downside risks to earnings in the event of profitability being lower than the Street’s and our lofty expectations. The high valuations of the stocks in automobiles & components, consumer durables and apparel, commodity chemicals and oil, gas & consumable fuels (downstream refining and marketing companies) sectors would suggest that the market does not expect any decline in profitability from current super-normal levels,” the brokerage said in a note.
Analysts at the brokerage expect a gradual derating in multiples of most consumption- and investment-related sectors over time as the disruption risks start to play out.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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