Indian stock market may stay range-bound amid rich valuations and global uncertainty, warns Kotak

The Indian stock market has been trading in a consolidation range for the past few weeks, and this range-bound movement is expected to persist in the coming months. 

According to domestic brokerage firm Kotak Institutional Equities, rich valuations, ongoing weakness in domestic consumption and investment demand, along with global geopolitical and macroeconomic uncertainties, may keep the Indian stock market range-bound over the next few months.

The brokerage notes that expensive valuations across sectors and stocks, domestic growth headwinds across consumption, investment, and outsourcing sectors, and global growth and inflation challenges are likely to act as headwinds for the Indian stock market.

Kotak finds that valuations have remained elevated across several sectors and stocks despite meaningful earnings downgrades. This, as per the brokerage, suggests that the market does not care about valuations and/or the market does not care about earnings.

"In our view, this nonchalant attitude perhaps reflects the market’s confidence in retail investors sustaining their hitherto price-agnostic purchases of stocks through mutual funds and FPIs staying positive on Indian equities based on a ‘narrative’ of a lack of alternatives in EMs," said the brokerage.

At a broader level, Kotak's analysis shows that valuations are higher than pre-pandemic levels despite significantly elevated risks to global growth and inflation, higher global interest rates and bond yields, domestic growth and profitability challenges for most sectors in the short term, and significantly higher medium-term disruption risks arising from increased competition and structural changes.

Some tailwinds for the Indian economy, but no strong recovery in sight

Kotak sees a few positives for the Indian economy in the form of lower interest rates and low commodity prices, which could support higher government and/or household savings.

Nonetheless, it ruled out a strong economic recovery due to ongoing challenges to consumption demand from inadequate creation of good-quality jobs, a slowdown in investment demand (likely flat government capex, weaker residential real estate sales, and no signs of recovery in private capex), and headwinds to exports/outsourcing from an uncertain global environment and slowing global growth.

4QFY25 results largely in line with expectations

According to the brokerage, the net income of the Nifty-50 Index in the March quarter grew 3.7%, which was 3.8% above its expectation. Net income of its coverage universe grew 8.2%, compared to its expectation of a 0.8% increase.

Kotak identified that the beat was led by banks (notably SBI), downstream oil marketing companies (due to unexpectedly high gross refining margins), and higher-than-expected other income. 

The EBITDA of the Nifty-50 Index during the quarter improved by 9.2%, compared to its expectation of 10.2%, while EBITDA of its coverage universe grew 11.2%, versus an expected 8.3% increase.

For FY2025, net income and EBITDA of the Nifty-50 Index grew by 6.4% and 4.5%, respectively.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.