The mood in India’s stock market is an odd mix of despair and euphoria. Investors have turned away from largecaps even as valuations have become more attractive, while small and midcap stocks continue to enjoy strong enthusiasm.
Kotak Institutional Equities believes the difference is less about fundamentals and more about what investors are choosing to chase.
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Kotak said positive developments in sectors such as capital goods, defence, CDMO and electronic manufacturing services have created excitement around small and midcap stocks. The government’s push for domestic manufacturing is also expected to support strong revenue growth in these sectors over the next few years. But there’s a catch. After the strong run in several of these stocks, Kotak is finding it increasingly difficult to find value across the small and midcap space.
When a good story starts driving the price
Defence is a good example of the broader trend. The sector has a strong growth narrative, backed by rising domestic manufacturing and government support. Kotak expects aerospace and defence earnings to grow 19% in 2027 and 18.9% in 2028. Yet investors are paying a steep price for that growth. The sector is trading at 39.3 times estimated 2027 earnings and 33 times estimated 2028 earnings, according to Kotak.
That is where the brokerage sees the problem. A strong business story can attract investors, but a popular story can also push prices well ahead of what the underlying value supports. “We have been here before and are struggling to find value in small and midcap stocks beyond financials and a few other sectors,” Kotak said.
The brokerage believes the enthusiasm is also fuelled by how investors respond to recent returns. In its view, past performance has increasingly become a guide for where investors want to put their money, rather than valuation.
Largecaps have a different problem
While small and midcap stocks are enjoying euphoria, largecaps are facing what Kotak describes as apathy. The brokerage sees decent value in a number of largecap stocks following recent price corrections, but investors have been reluctant to return to them. Kotak attributes this partly to investors’ preference for quick returns and near-term price movements.
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“We attribute the presence of despair and euphoria in the same market to large sections of investors taking cues from prices rather than from value,” it said.
The West Asia conflict could further test this divide. Kotak believes a resolution could trigger a rebound in largecaps, while a prolonged conflict, higher crude prices and rising global bond yields could put pressure on small and midcap stocks. For now, the market appears to be rewarding the better story. Kotak’s warning is that when sentiment changes, investors may be forced to look again at the difference between a stock that has a compelling narrative and one that still offers value.
Disclaimer: This article has been written by Sakshi Kumari, who is not a SEBI-registered Research Analyst or an Investment Adviser. Sakshi Kumari and her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here
