Rally in PSU stocks flawed, book profit, says Kotak

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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.