Kotak Warns of Unsustainable Valuations in Indian Stock Market


Kotak Institutional Equities has raised alarms about the sustainability of valuations for numerous Indian companies. The brokerage firm has highlighted that 104 companies are trading at price-to-earnings (PE) ratios exceeding 50 times, with nine companies trading at over 100 times PE.

For a company to justify a PE of 100 times, it would need its earnings to grow by an astronomical 83,000 times in the 100th year. According to Kotak’s discounted cash flow (DCF) model, sustaining such high PEs would require extremely steep and prolonged growth rates.

Kotak has pointed out that many of these high PE companies operate in traditional sectors that are vulnerable to significant disruption risks. The brokerage firm observed a prevailing sense of complacency or excessive optimism in the Indian stock market, which has led to inflated stock prices. This has resulted in a disconnect between valuation methodologies and fundamentals, with high multiples being deemed acceptable despite their unrealistic implications.

Even when excluding young companies and certain industries, Kotak’s analysis reveals that the number of high PE companies remains substantial. The firm warns that many sectors and stocks are currently benefiting from exceptionally high profitability and returns, which may not be sustainable over the next 5-10 years due to increasing disruptive forces.

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