Kotak stops mid-cap recommendations after 'irrational' rally

Kotak Institutional Equities, on Monday, stopped recommending Indian mid-cap companies since it could find no stocks, other than a few in the financial space, with room to rise following the index's record-breaking rally this year.

The more domestically focused mid-cap index has hit multiple record highs in its 31 per cent surge so far this year, which easily outpaced the 10% rise in the benchmark Nifty 50 index and has prompted warnings of a market correction.

"The primary driver of the rally appears to be irrational exuberance among investors, with high-return expectations being driven by the high returns of the past few months," Kotak analysts Sanjeev Prasad, Anindya Bhowmik and Sunita Baldawa said in a note.

"We see limited point in trying to find fundamental reasons behind the steep increase in stock prices ..."

That rally has left most of the 15 stocks in Kotak's model mid-cap portfolio trading near their 12-month fair values, and the brokerage said it could not find too many outside the banking, financial services and insurance (BFSI) space with decent potential upside. The portfolio has five BFSI stocks.

"It would be incorrect to recommend stocks with low conviction and potential downside to our fair values," Kotak analysts said, arguing that company fundamentals have worsened in many cases.

The brokerage said institutional investors' favourites -- like Aditya Birla Fashion, Crompton Greaves, Jubilant FoodWorks, Voltas, TCNS Clothing , Page Industries and Vedant Fashions -- have been laggards, given the weak consumption demand.

It noted that the favourites are in the broader "investment" sector, like capital goods, defence, railways, real estate, renewables.

However, the brokerage cautioned it was not sure about the quality of these stocks given their historically weak execution and governance track records.