Kotak Institutional Equities is cautioning investors about the recent surge in PSU stocks. They believe these rallies were based on something other than solid company improvements but on optimistic sentiments and flawed valuation methods.
They said that these price increases will not sustain themselves in the long term; PSU companies are reinventing themselves in sunset industries, industries that are dying, and these government policies will not support them in the long run. They advise investors to consider their thoughts again if they go for the long term.
They note that short-term profit and volume expectations are driving up prices, along with incorrect methods of assessing their value.
Rallies in PSU Stocks
The rally in PSU stocks is seen across various sectors, which Kotak finds concerning because it’s happening without significant improvements in the companies’ fundamentals or government reforms.
PSUs outperform private companies in the same sectors, which means that this price rise is not because of growth in the company’s fundamentals. Holding these PSU Stocks might cost you a fortune.
Kotak pointed out that some defense companies like BEML, Bharat Dynamics, Bharat Electronics, Cochin Shipyard, Hindustan Aeronautics (HAL), and Mazagon Dock Shipbuilders have seen a massive jump in their prices from 91% to 166%, mainly because of defense contracts they got. Companies will have to handle 1.9 trillion rupees (1 lakh 90 thousand crores) worth of orders every year while maintaining their current profit margin to justify their current stock price.
612 Billion Revenue
But in reality, all of these companies combined generated a revenue of 612 billion rupees in 2023, while the government spent 1.5 trillion rupees on defense. This means that the current expectations for defense contracts are much higher than historically seen.
Coal India, a government-owned company, has seen its stock price increase by 104% over the past year. This growth is primarily because investors are willing to pay more for the company’s shares, as they believe Coal India is undervalued and will likely sell more coal in the coming years. These companies benefit from increased investor interest, even though limited shares are available for purchase.
Kotak has asked investors to exit these stocks and not get too excited about the current market trends. Many companies in gas, consumables, electric, etc., are trading at a higher price than the private companies in the same sector.
Some mining companies with underlying business performance also have unjustifiable stock prices, and their prices are only continuing to rise. Government policies might temporarily benefit public sector companies (PSUs) but could also prevent them from adapting to future challenges. For example, PSUs might invest in outdated industries rather than preparing for future changes in the market.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies and not of TheStockMarketLive. We advise investors to check with certified experts before making any investment decisions.TheStockMarketLive. We advise investors to check with certified experts before making any investment decisions.
