Indian headline indices S&P BSE Sensex and Nifty50 have been creating new records since its June 4 debacle when the market crashed on the election results not giving a full majority of the Bharatiya Janata Party (BJP). There has been no looking back since then, with Sensex traversed over 8,300 points while Nifty soared 2,500 points. In percentage terms, the gains have been to the tune of 11.5%.
On June 4, the Sensex hit a low of 72,079 while the Nifty bottomed at 21,884.50. Both indices today hit fresh lifetime highs of 80,392.64 and 24,401.
“We concur with bullish arguments — decent macro, strong earnings growth, long-term growth prospects – are pointless without the overlay of valuations. It is obvious that the same argument cannot hold at all price levels,” the note said.
Here are Kotak’s 5 myths for investors:
Myth 1: Indian market at reasonable valuations
Kotak has debunked what it called a myth that ‘Indian markets are trading at reasonable valuations’. It said that this superficial view of the Indian market is typically based on the valuations of the Nifty-50 Index. The Nifty-50 Index may be reasonably valued in the context of historical valuations and bond yields but most other parts of the market are trading at full-to-frothy valuations after a massive rerating in their multiples in the past 2-3 years.
To support its point, Kotak said that most of the non-BFSI stocks in the Nifty-50 Index were trading at elevated multiples. 1-year forward P/E of 38 non-BFSI Nifty counters are currently in a range of 111 (highest) and 7 (lowest) with Grasim Industries topping the chart while ONGC at the bottom. Titan’s 1-year forward P/E stands at 67 while it is 64 for Tata Consumer Products. Britannia Industries and Asian Paints are hovering around 52 and 52, respectively.
Adani Ports and SEZ’s 1-year forward P/E is at 29, up from 17 in March 2019.
As for the BFSI stocks, the lowest 1-year forward P/B is for the State Bank of India (SBI), up from 1.4 in March 2019 and 1.3 in March 2014. For HDFC Bank, it has gone down to 2.6 from 3.8 in March 2019. Kotak Mahindra Bank, IndusInd Bank, HDFC Life Insurance, Bajaj Finserv, Bajaj Finance, and Axis Bank are other stocks that have seen a dip in 1-year forward P/B from the March 2019 levels.
Myth 2: Strong GDP growth argument
Kotak said that the strong GDP growth argument is not valid at all price points and is not a sufficient condition for strong equity returns. Indian markets have shown time-corrections even during periods of strong GDP growth. The note highlights how India’s GDP growth has been in a tight band while market P/E has moved in a much wider band linked to expectations about the future.
Forward returns of the market have an inverse relationship with the price being paid and the correlation has weakened in the post-pandemic period though
due to expectations of high returns from equities at all price points among a section of the market.
Myth 3: Higher post-tax returns in equities versus debt
Likening a comparison between equity and debt’s post-tax returns to that of apples and oranges, it said that it is often heard that higher post-tax returns of equities versus debt was a reason for the strong participation of retail investors in equity markets. There are two obvious flaws with this argument— one is that it does not hold at all price points for equities; yields (returns) will be lower at higher prices and secondly, equities have a higher risk compared to debt and the difference in risk profile has to reflect a certain risk premium for equities.
4) Myth 4: Strong earnings CAGR is a given
Investors believe that Indian equities are pre-destined to deliver strong earnings growth for a long period of time. While it agreed with the view, Kotak said that it would not stretch this point. It notes that most domestic-oriented sectors are currently enjoying elevated profitability. Investors may want to remember (or forget) that several high-flying sectors have ‘crashed and burnt’ in the past including two of the current market favorites viz. electric utilities and real estate, the note said.
Myth 5: Flows determine returns
Many investors remain entrenched in their beliefs that ‘flows’ can explain excess returns over a long period of time. While previously the focus was excessively in decoding the mood of foreign investors, of late the same has turned toward deciphering the sentiment among retail investors.
It said that flows will follow expectations and market prices reflect changes in expectations, not changes in flows. The net amount of ‘money’ is always zero in the secondary market because somebody will buy and somebody will sell at all times and at all price points.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
