Value Investing Opportunities Emerging Across Market Caps, Sectors, and Stocks, Says Kotak's Sanjeev Prasad

Market Correction Creates Opportunities, but Risks Remain

The sharp market correction since the beginning of the crisis in West Asia has led Kotak Institutional Equities to identify value emerging across various sectors and stocks. The correction, which has seen the broader market decline by 8 percent and several stocks by more than that since the start of the Iran-Israel/US war, implies a prolonged crisis and a significant cut to earnings in perpetuity, according to a report by the brokerage.

The market's reaction to the crisis suggests that it is pricing in exacerbated fears surrounding war, with negative implications for growth and profitability, or is extrapolating near-term concerns in perpetuity. Kotak's base case scenario, however, entails elevated oil prices for the next few weeks and a subsequent decline in oil prices to a higher plateau compared with pre-war levels.

Kotak Institutional Equities is working with the assumptions that the ongoing conflict will continue over the next few days or weeks, tensions will remain elevated for the next few months, the Strait of Hormuz will reopen over the next few weeks, and there will be no long-lasting damage to the oil & gas infrastructure in the Middle East. The brokerage expects the earnings impact to remain limited if the ongoing conflict is short-lived, but cautions that a prolonged escalation lasting several months could pose a higher downside risk for multiple sectors, depending on their ability to pass on cost pressures through price hikes.

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The brokerage has largely retained its earnings estimates for most downstream companies, with the exception of PSU oil marketing firms. Its base case assumes a short-duration conflict, followed by a normalization in crude prices within a few weeks, no significant disruption to oil and gas supplies, and only modest-to-moderate price increases by companies to offset higher input costs.

On the broader market, Kotak notes that the recent correction in valuations has improved the reward-risk balance across several sectors and stocks. However, the brokerage stops short of calling it a strong buying opportunity. Unlike periods such as March 2009 or March 2020, when valuations were deeply compelling, Kotak believes that much of the consumption and investment universe continues to trade at relatively elevated levels.