Kotak Securities anticipates limited upside for Nifty levels next year: Here’s why

Brokerage house Kotak Securities anticipates that the NIFTY will reach 21,834 levels by the close of the calendar year 2024. Currently, the Nifty is at the 21,418 level. The brokerage house believes that the Indian markets will experience consolidation for a while, given the rich valuations.

In their base case scenario, they value NIFTY at a 5 percent discount, at 18.0 times the last 10-year average price-earnings (PE) ratio of 19.0 times on the FY26 earnings per share (EPS) of Rs 1213, to arrive at the December 2024 Nifty target.

Segment-wise, they contend that large-cap stocks offer a better reward-risk balance due to more reasonable valuations compared to the lofty valuations of most mid- and small-cap stocks.

In a bullish scenario, Kotak Securities values Nifty at a 5 percent premium, using a 20 times multiple of the 10-year average PE of 19, assigning a target of 24,260 for December Nifty. In a bear case, they value NIFTY at a 15 percent discount — 16 times multiple of the 10-year average PE of 19 — which results in a target level of 19,408.

Mixed Macros

On a macro level, Kotak Securities finds India’s macroeconomic position to be lukewarm — neither too exciting nor too worrisome. They state, “Economic growth looks good on a year-on-year basis but is still feeble on a long-term basis. Inflation is on the higher side of the RBI’s target band, and the RBI will likely continue with its hawkish stance for the next few months. The fiscal position is challenged but not alarming.”

The brokerage house expects decent growth on a year-on-year (YoY) basis in FY24 and FY25 but notes that growth is still quite anaemic compared to pre-pandemic levels. In particular, consumption demand has been muted due to weak labour market conditions and high inflation across discretionary and staple products. A combination of low growth in income and wages for large sections of the population and high inflation in basic staples and discretionary items has severely dented affordability for a large section of households.

FII Flows

India witnessed strong FII inflows along with other emerging markets from April 2023. It peaked in July 2023 with inflows of Rs 46,600 crore in equity. However, they turned negative in September 2023 and October 2023, with rich valuations and upcoming state and general elections over the next 6-8 months creating political uncertainty.

Kotak Securities states that “Going forward, odds are evenly balanced as headwinds emanating from firm US interest rates, El Nino impact on crops and inflation, volatile crude, and geopolitical uncertainty still abound.”

They assume moderate FDI flows linked to the decline in gross FDI inflows from overseas entities and a sharp increase in gross FDI outflows from overseas entities, essentially exits from PE and VC funds. “FY25 will see FPI debt inflows of around US$25 billion following the inclusion of certain sovereign bonds in certain Emerging Markets (EM) bond indices,” said Kotak Securities.

Mid-cap vs Small-cap vs Large-cap view by Kotak Securities

Kotak Securities prefers mega-caps, noting their reasonable valuations and greater immunity in the event of any negative developments in the next few months. They observe that the Indian stock market has three distinct markets within it, each with its dynamics and embedded expectations.

(1) The mega-caps are in a bear market, with many large-cap stocks delivering modest positive or moderate negative returns in the past 2-3 years.

(2) The large-cap and high-quality mid-caps are in a bull market, with the weak operating performance in the short term and likely deterioration in fundamentals in the medium term being largely ignored by the market.

(3) Several low-quality mid-caps and small-caps, in general, are in a bubble market, with the market attaching unrealistic narratives to many stocks.

Segment-wise, they maintain that large-cap stocks offer a better reward-risk balance due to more reasonable valuations compared to lofty valuations in most mid- and small-cap stocks.

“We find decent value in a few large-cap stocks and the BFSI sector only in light of rich valuations of most stocks in the consumption, investment, and outsourcing sectors. As the broader market valuations are rich, opportunities arising from market correction can be used to add quality stocks (with attractive valuation) from a long-term investment perspective,” said Kotak Securities.