Kotak Institutional Equities brokerage has flagged the recent upsurge in the Public Sector Undertaking (PSU) domain as flawed and is advising investors to seize the opportunity to book profits and largely exit their positions.
In its report dated March 9, the brokerage outlined that the surge in PSU stocks lacks substantial changes in their underlying fundamentals and the absence of significant reforms. This surge appears to be primarily sentiment-driven, rather than grounded in tangible improvements.
Kotak elaborated on three main issues it identified with the rally in PSU stocks: unrealistic assumptions driving pricing, profitability, and volume; flawed valuation methodologies; and unrealistic narratives surrounding government agendas, policies, and regulations.
The brokerage highlighted that while government ownership is a common denominator among PSU stocks, the performance varies significantly based on sectoral and company-specific fundamentals.
The BSE PSU index has witnessed an astonishing surge of approximately 102% in the current fiscal year (FY24). Remarkably, data from Trendlyne reveals that none of the stocks in the BSE PSU index have recorded negative returns over the past year.
Notably, certain stocks such as IRFC have experienced meteoric rises of over 400% in the last year, with others like Mangalore Refinery And Petrochemicals, HUDCO, and Ircon International surging over 300% each. Almost 40 stocks within the BSE PSU index have seen gains exceeding 100% during the same period.
Kotak cautioned that many non-financial stocks within sectors like electric utilities, metals and mining, and oil, gas, and consumable fuels are trading at lofty valuations, despite weaker fundamentals or precarious business models. This raises concerns about sustainability and future viability.
Kotak emphasized the discrepancy between the strong performance of PSU stocks and their low ownership among institutional investors, especially Foreign Portfolio Investors (FPIs). While institutional investors remain cautious, non-institutional investors, particularly domestic High Net Worth Individuals (HNIs) and retail investors, exhibit significant optimism towards PSUs. This optimism may stem from a renewed faith in government initiatives or the rampant surge in PSU stock prices.
Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies. We advise investors to check with certified experts before making any investment decisions.
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