Indian equities risk structural de-rating amid disruption concerns: Kotak Institutional Equities

Indian equities may be facing the risk of a structural de-rating, rather than a short-term correction, amid rising disruption across sectors and insufficient corporate investment to address emerging challenges, according to a report by Kotak Institutional Equities.

The report said the recent correction and sustained underperformance of Indian stock markets compared with global peers could reflect the beginning of a more permanent reset in valuation multiples. Kotak cautioned that investors should not assume the ongoing weakness is merely a temporary phase.

“The key question is whether the recent correction and continued underperformance represent a temporary blip or the start of a permanent reset in market multiples to their ‘correct’ levels,” the report noted. The distinction, it said, is critical for future return expectations.

Disruption risks rise across sectors

Kotak highlighted that Indian companies are facing growing technological and competitive disruption, including from emerging high-tech firms in other developing markets.

However, it flagged that corporate investment to counter these threats has remained limited, increasing the risk of sustained pressure on valuations.
If the correction proves structural, the report warned that several sectors and individual stocks could witness deeper de-rating, either through further price declines or prolonged periods of muted stock performance.

Valuations may align with fundamentals

The report said a permanent reset would bring market valuations more in line with underlying business fundamentals and the evolving competitive landscape. Such an adjustment, while painful in the short term, could reflect more realistic growth and profitability assumptions amid changing sector dynamics.

Kotak added that while market participants may continue to debate near-term triggers for volatility, the bigger concern lies in the long-term implications of a potential structural revaluation of Indian equities.

“If this shift is structural, it could redefine return expectations across sectors,” the report said, signalling a more challenging environment for equity investors going forward.