Indian Markets More Rational, Less Forgiving Of Earnings Misses, Says Kotak Institutional Equities MD

The Indian stock markets have evolved and are no longer as forgiving as they once were when it comes to the financial performance of companies that fail to meet expectations, according to Kotak Institutional Equities’ Managing Director and Co-Head Sanjeev Prasad.

Speaking to NDTV Profit about the stock market corrections over the past few weeks, Prasad highlighted a new trend seen since the Q2 earnings season. 

“We have seen this trend starting from the September quarter. The market is no longer forgiving of earning misses that it used to be a few quarters back when bad news used to get ignored and positive news used to get rewarded significantly,” he said.

The markets are now in a position where they are a lot more “rational,” he mentioned.

“I think we are more in a situation where the market will become a lot more rational because of the fundamentals and earnings, rewarding good news but punishing bad news quite significantly,” the Kotak Institutional Equities MD said.

Companies are not meeting the “limited” expectations of the markets, making it a challenge, Prasad noted.

“I think the issue we have is companies are sort of failing to meet the very limited expectations of the market. So that's where the challenges are,” he said.

Companies like Dixon Technologies, Zomato, etc., which have posted quite robust Q3 earnings, have “innovative” multiples, according to Prasad.

“The multiples are very innovative for the names you mentioned, like Zomato, Dixon, etc. And they have all been priced to perfection, reached disappointment, and the stocks are now getting hammered quite significantly,” he said.

Speaking about large-cap consumption stocks, Prasad mentioned that the valuations of these companies are as high as pre-pandemic levels but their volumes have gone down.

“Now you roll forward to currently, you are pretty tepid in volume growth for most parts of the consumption space, a low single digit in most of the statement names,” he said.

Increased competition is also emerging in this space, affecting all companies by limiting incremental volume growth and, in turn, hindering profitability, the Kotak Institutional Equities MD stressed. 

“If you look at the structural issues that are emerging across the consumption space, you're starting to see more competition within every category of the broader consumption space,” Prasad mentioned.

“So in the context of the fact that the incremental volumes would probably get across more players now, the profitability, which has been the higher side, would logically come down given more competition,” he added.