Synopsis: Kotak Institutional Equities sees significant downside potential for various 'narrative' stocks, particularly in the PSU, capital goods, cement, and utility sectors. BHEL, Cochin Shipyard, Dixon Technologies, and JSW Energy are among stocks with potential declines of 50% or more based on Kotak's fair value estimates.
Kotak Predicts Sharp Downside for 'Narrative' Stocks Amid Frothy Valuations:
Kotak Institutional Equities has raised concerns about the valuation levels of several publicly traded companies, particularly within the PSU and 'narrative-driven' stock segments.
In its latest research note, Kotak flagged stocks like BHEL, NTPC, Cochin Shipyard, and Bharat Electronics (BEL) as being overvalued relative to their fundamental business metrics, with prevailing valuations reflecting overly optimistic profitability and volume assumptions.
The brokerage assigned a fair value of Rs 110 for BHEL, suggesting a 56% downside potential, while Cochin Shipyard’s fair value of Rs 800 hints at a 52% decline.
Similar bearish targets include Dixon Technologies at Rs 8,430 (50% downside), JSW Energy at Rs 330 (49% downside), and HPCL at Rs 200 (47% downside). UltraTech Cement was also flagged, with a fair value of Rs 6,900, indicating a potential drop of 41%.
Capital goods stocks such as CG Power and Siemens, cement stocks like Ambuja Cements and Shree Cement, and utilities such as Tata Power, NTPC, Power Grid, and NHPC are also projected to face declines of up to 39%.
Market Dynamics and Concerns:
Kotak categorizes most investment stocks into the full-to-frothy valuation range, while outsourcing shares fall within the fair-to-full category, and financial stocks appear relatively better at reasonable-to-fair valuations.
The firm noted a growing disconnect between stock valuations and their fundamentals, particularly among 'narrative' stocks, which have seen sharp corrections over the past 3-6 months.
Despite these corrections, the brokerage pointed out limited downgrades to FY2025 and FY2026 consensus EBITDA and EPS estimates, indicating that the market may now be challenging the narratives that previously underpinned these valuations.
Only 26% of stocks under Kotak's coverage, comprising 11% BFSI and 15% non-BFSI stocks, exhibit more than 10% upside potential.
Furthermore, 31% of stocks are trading below their historical 10-year averages, highlighting concerns over inflated valuations in several sectors.
Indices Performance:
The Indian equity markets have experienced modest corrections, with the Nifty, Nifty Midcap 100, and Nifty Smallcap 100 indices falling 7%, 6%, and 4%, respectively, from their peak levels.
Kotak attributed these declines to earnings downgrades and sharp misses in consumption-related sectors, as well as fading optimism in 'story-dominated' sectors.
In conclusion, Kotak’s analysis underscores a cautious approach to current market valuations, emphasizing the potential for significant downside in several 'narrative-driven' and overvalued stocks.
Investors are urged to reassess their portfolios, particularly in sectors where valuations appear frothy or disconnected from fundamentals.
Financial stocks emerge as a relatively safer category, but the overall market sentiment suggests prudence in the near term.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Readers are encouraged to consult a qualified financial advisor before making any investment decisions.
