Kotak halts midcap stock recommendations, says 'irrational exuberance' behind rise in prices

Kotak Institutional Equities has ceased recommendations of mid-cap companies due to a perceived lack of growth potential, with only a handful in the financial space showing promise after a historic rally this year.

The midcap index has experienced a remarkable 31% surge in 2023, which eclipses the 10% rise in the Nifty 50 benchmark index and has sparked concerns of an imminent market correction.

In a note, Kotak analysts Sanjeev Prasad, Anindya Bhowmik, and Sunita Baldawa attributed the rally to "irrational exuberance among investors" driven by recent high returns. They emphasized, "We see limited point in trying to find fundamental reasons behind the steep increase in stock prices..."

Kotak's model mid-cap portfolio now finds most of its 15 stocks trading close to their 12-month fair values. The brokerage acknowledged that it struggled to identify opportunities outside of the banking, financial services, and insurance (BFSI) sector. Of the portfolio's holdings, five belong to the BFSI sector.

The analysts stated that recommending stocks with low conviction and potential downside, given deteriorating company fundamentals in many cases, would be incorrect. Among the notable underperformers in Kotak's model mid-cap portfolio are Aditya Birla Fashion, Crompton Greaves, Jubilant FoodWorks, Voltas, TCNS Clothing, Page Industries, and Vedant Fashions.

The brokerage also highlighted that some of these stocks have underperformed due to weak consumer demand.

Kotak Institutional Equities, also expressed reservations about the quality of these stocks due to their historical track records of weak execution and governance issues.

The decision to halt mid-cap recommendations reflects a cautious approach in response to market dynamics and the uncertain outlook for mid-cap stocks in India's current economic landscape.