BHEL, COCHIN SHIPYARD, BEL, OTHER ‘NARRATIVE STOCKS’ COMPLETELY DISCONNECTED FROM FUNDAMENTALS, SAYS KOTAK EQUITIES

Indian stock market has corrected from its record high levels, with the benchmark Nifty 50 trading at levels more than 1% lower from its lifetime high hit earlier this month. While the index has corrected moderately, there is a larger fall witnessed in the ‘narrative’ stocks.

Kotak Institutional Equities believes that ‘narrative’ stocks are still completely disconnected from fundamentals and their real values are 10% - 50% of their prevailing market capitalisations. It noted that most of the ‘narrative’ stocks trade at unfathomable valuations despite their supporting narratives being based on unrealistic assumptions of growth and profitability.

“A few ‘narratives’ have disappointed (offshoring, premiumization) and others (privatization of PSUs, profitability recovery and sustenance) have sustained despite contrary signs. In our view, ‘narrative’ stocks are still completely disconnected from fundamentals. In our view, their real values are 10%-50% of current market capitalization,” Kotak Institutional Equities said in a report.

The recent correction in some of the ‘narrative’ investment and PSU stocks may reflect mild global risk-off sentiment, changed preference for defensives versus ‘narratives’ and increased focus on the fundamentals of the stocks, according to the brokerage firm.

However, the brokerage firm still sees a large gap between the market capitalisations and fundamental fair value of the ‘narrative’ stocks.

“Overall sentiment is still quite euphoric, as can be seen in full-to-frothy valuations for most sectors and stocks and large inflows into domestic Mutual Funds from price-agnostic investors,” Kotak Equities said.

Some of the railway and defence stocks have fallen steeply since July, including Mazagon Dock Shipbuilders, Bharat Dynamics, Cochin Shipyard, Hindustan Aeronautics, Rail Vikas Nigam Ltd (RVNL), RailTel and IRFC, the brokerage firm noted.

Moreover, shares of EMS companies like Amber Enterprises India, Dixon Technologies (India), Syrma SGS Technology and Kaynes Technology India have also been correcting since April.

The brokerage firm attributes the recent rally in defensive stocks, such as consumer staples and IT services to some extent, at the expense of high-beta investment and ‘narrative’ stocks to the modest risk-off mode.

“We ascribe the shift in sentiment to a somewhat risk-off mode due to recent economic data indicating a slowdown in the US, continued stasis in China’s economic policies, which have resulted in a crisis of confidence among companies and households both and continued insipid performance of the EZ economy. Among ‘global’ stocks in India, commodity stocks have seen a moderate correction but IT services stocks are holding firm,” Kotak Equities said.

However, it believes the stiff valuations of the defensive stocks pose further challenges to portfolio construction.

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

2024-09-12T10:38:42Z dg43tfdfdgfd