‘Cautious’ Indian Stocks Remain Overvalued Despite Steep Correction, Says Kotak

The steep correction in the Indian market that took the benchmark indices to the so-called 'correction' zone remains cautious, given full to-frothy valuations in most parts of the market, according to Kotak Securities.

The reward-risk balance for the Indian market is "quite poor", despite the over 10% fall since its life high in September last year, the brokerage said. The reaction of "euphoric retail investors, the bedrock of the market, will be interesting to see", Kotak said in a note on Jan. 13.

As of Monday, the benchmark Nifty 50 saw its worst start to a year since 2016, with a fall of 4.83% in the first nine sessions. Since its life-high last year, the gauge has fallen by 11.5%.

The small-cap benchmark—NSE Small Cap 250—has tumbled over 6.40% in the first nine sessions in 2025, the highest in any year. Its mid-cap counterparts saw the worst start to a year since 2011.

Despite this, analysts at Kotak Securities said most stocks are quite overvalued. Further, earnings upgrades look difficult given generous assumptions and global bond yields may hold up 'higher-for-longer', it said.

"There is low scope for earnings upgrades, given fairly aggressive earnings. profitability and volume assumptions across sectors," Kotak said. There is also the uncertain global macro-environment and likely higher-for-longer bond yields and interest rates that weigh on the domestic stocks.

The rich valuations of most parts of the market "reflect the price-agnostic buying behaviour of non-institutional investors and forced' buying of domestic institutional investors for the past two to three years".

Investors were willing to give any multiple for stocks irrespective of the business models and fundamentals, Kotak said, given the irrational buying that sent the benchmarks to life high. Investors used "exotic valuation methodologies and multiples and believe any random narrative about sectors and stocks."

A slowdown in India's economic growth, the new US administration under Donald Trump, rate cut bets, and declining current add to the woes that broader stocks face, along with its blue-chip peers.