The one-way ride on PSU stocks is beginning to look scary

The latest leg of the rally from 26 October has seen the BSE PSU index return 52.6% to 18,123.77 against the Sensex’s modest 13.6% gain to 71,731.42 on Monday.  (REUTERS)
The latest leg of the rally from 26 October has seen the BSE PSU index return 52.6% to 18,123.77 against the Sensex’s modest 13.6% gain to 71,731.42 on Monday. (REUTERS)

Summary

  • Sensex’s returns pale in comparison with the BSE PSU index's rally over three months

Mumbai: Euphoria has gripped stocks of government-owned companies, with their rally over the past three months making the benchmark Sensex’s returns pale in comparison, and prompting notes of caution from analysts.

The latest leg of the rally from 26 October has seen the BSE PSU index return 52.6% to 18,123.77 against the Sensex’s modest 13.6% gain to 71,731.42 on Monday. Investor frenzy for the stocks drove the index up to a RECord 18,428.25 during the day.

 

Life Insurance Corp. of India, for one, which traded at 605 apiece on 26 October, way below its IPO price of 949, hit a record 1,028 on Monday. Others which hit new peaks include Coal India ( 450), BPCL ( 588.80), HPCL ( 517.35) and Gail ( 186.50).

“One needs to be a tad cautious as PSU stocks have run up significantly and profit-booking could lead to volatility and shakeout in certain segments of the index," said Siddhartha Khemka, retail research head, Motilal Oswal Financial Services.

Analysts attribute the rally to many of the stocks rising in unison after relatively underperforming their listed private peers in the past decade, cheaper valuations and a change in fundamentals.

For instance, thermal power producer NTPC gained 201% over the past decade against Tata Power’s 446% return and IOC 259% against Reliance Industries’ 661%. Again, the trailing 12-month valuation of NTPC stands at 16.7 times against Tata Power’s 35.2 times. IOC’s valuation is a mere 5.2 times against Reliance’s 27.8 times.

“The rise in the PSU pack is not unusual, nor surprising, and neither are the stocks in bubble territory," said Deepak Shenoy, founder of portfolio management firm Capital Mind. “The rally can be attributed to a combination of underperformance in the past many years and some change in fundamentals."

Shenoy pointed to NTPC, which proposes to generate nuclear power from being a thermal power producer, and PFC and REC getting into the renewable financing space.

Incidentally, investors who acted on Prime Minister Narendra Modi’s jibe at the Opposition last August—he had asked investors to buy shares of PSUs criticized by the latter—appear to have got rich, led by a surge in shares of LIC. Twenty two of the 56 PSU index stocks hit new records on Monday.

Shenoy of Capital Mind said, “What’s probably taken the market by surprise is the re-rating of many of these stocks together.This keeps happening in market cycles. Even after the rise, company valuations aren’t stretched. Look at IOC, which trades at five times price to earnings multiple while its net profit grew 80.6 billion (in Q3FY24) against market estimates of 49.14 billion," he explains.

Yet, the simultaneous run-up in PSU stocks over the past three months has taken the index into vastly overbought territory, indicated by the relative strength index or RSI, which measures price movement speed and change.

Rohit Srivastava, founder of analytics firm IndiaCharts said the reading hit a record high of 92.35 in the week ended last Friday. A measure above 90 last happened on 12 September 2003, after which the index corrected 18.5% in the subsequent week. “Such steep corrections could happen again before any rally resumes," cautioned Srivastava.

A normal reading for an index or stock is between 30 and 70. Above 70 is overbought while above 90 is “superly overbought," said Srivastava. Below 30 is oversold.

Veteran investor Madhusudan Kela added that investors should “pick and choose" stocks with “intrinsic value" and “attractive valuations" among the pack. Kela said that he remained bullish on PSU bank stocks and would use “any dip" to buy the same.

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