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Business News/ Markets / Stock Markets/  Rally in PSU stocks flawed, book profit, says Kotak
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Rally in PSU stocks flawed, book profit, says Kotak

Stocks such as IRFC have vaulted over 400 per cent over the last year while stocks like Mangalore Refinery And Petrochemicals, HUDCO and Ircon International have surged over 300 per cent each in the last one year.

The BSE PSU index has surged about 102 per cent so far in FY24. (REUTERS)Premium
The BSE PSU index has surged about 102 per cent so far in FY24. (REUTERS)

Brokerage Kotak Institutional Equities finds the recent rally in the PSU (Public Sector Undertaking) space flawed and advises investors to book profit and exit most of their positions.

The brokerage firm, in its March 9 report, pointed out that PSU stocks have rallied without any significant change in their fundamentals as well as without any meaningful reforms. This indicates the eye-popping rally in them was primarily driven by bullish sentiment only.

"The strong rally in PSUs across sectors without any meaningful change in the fundamentals of or structural reforms in most sectors and the massive outperformance of PSUs versus private sector peers in the same sectors highlights the inherent flaw with the rally in PSU stocks. We would recommend investors to use the rally in the PSU stocks to exit most of their positions," Kotak said.

Also Read: Frothy valuations: Reality check for Indian investors

"We see three broad problems with the rally in PSU stocks—(1) bullish pricing, profitability and volume assumptions, which result in over-optimistic medium-term earnings estimates, (2) incorrect valuation approaches to value earnings with unsustainable drivers and business models with questionable terminal value, and (3) unrealistic narratives in several sectors related to government agenda, policies and regulations.," said Kotak.

Also Read: Inflation data, FII activity, global cues among key market triggers as Nifty 50 eyes 22,800 this week

The brokerage firm pointed out that government ownership seems to be the only common factor for the performance of PSU stocks, with disparate sector- and company-specific fundamentals.

The BSE PSU index has surged about 102 per cent so far in FY24.

According to data available with the equity research platform Trendlyne, no stock in the BSE PSU index has recorded a negative return over the past year.

Stocks such as IRFC have vaulted over 400 per cent over the last year while stocks like Mangalore Refinery And Petrochemicals, HUDCO and Ircon International have surged over 300 per cent each in the last one year. Nearly 40 stocks of the BSE PSU index have jumped over 100 per cent in the same period.

Also Read: HDFC Bank share price falls after CLSA downgrades stock, cuts target price

"Most non-financial stocks in the electric utilities, metals and mining and oil, gas and consumable fuels sectors are trading at very expensive valuations based on (1) their premium to private sector peers, despite weaker fundamentals (metals and mining) or (2) their weak business models (certain capital goods and electric utilities stocks and all oil, gas and consumable fuels stocks) in the context of mediocre FCF-to-PAT ratios, low or negative terminal value and growing risks of existential irrelevance," Kotak pointed out.

Kotak underscored that the strong performance of PSU stocks is in sharp contrast with the low ownership of most PSU stocks among institutional investors, especially FPI investors.

"Institutional investors seem to be quite cautious, whereas non-institutional investors (domestic HNI and retail investors) seem to be very positive on the fortunes of PSUs. The latter’s enthusiasm may stem from (1) renewed faith in the government’s ability to rejuvenate PSUs and/or (2) rampant surge in stock prices of PSUs," Kotak said.

Read all market-related news here

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 11 Mar 2024, 11:16 AM IST
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