Kotak Institutional Equities has refused to accept the market's new narrative of PSUs that may have contributed to the sharp rally in stocks of state-run companies recently. In a report, the analysts have rejected positive outlook on the sector, citing concerns about near-term focus, profitability, and overlooking risks in the medium term, business models, and disruptions.
PSU stocks surged 19-443 percent in the past year, led by capital goods, electric utilities, financials, and oil and gas. "We find certain assumptions, surrounding the medium-to-long-term growth and profitability of these sectors, to be highly optimistic. We doubt much has changed in most sectors," the Kotak report said.
PSUs in capital goods experienced a notable rerating on the back of increased order flow, but Kotak has warned of underestimated risks in assuming prolonged large order inflows, especially in sectors like thermal electricity generation. "The government’s three-in-one role of buyer, owner and policymaker or regulator creates uncertainty regarding the companies’ future earnings and returns," it said.
In electric utilities, Kotak notes a significant rerating, highlighting NTPC's valuation concerns and the market's overestimation of growth potential for PowerGrid. The transition to solar electricity and competitive tariff-based bidding projects pose risks, according to the analysts.
" We are puzzled by the market’s confidence," Kotak wrote on the rally in state-run oil marketing companies (OMCs). In OMCs, the rerating was driven by high profitability assumptions, but Kotak has questioned market confidence, citing volatile marketing margins and optimistic profitability assumptions. "The government pricing policy uncertainty and low FCF-to-PAT ratios make P/E-based valuations irrelevant," it said.
Portfolio revision
Kotak said it has added Pidilite Industries to its portfolio with a weight of 150 basis points while exiting PowerGrid Corp (190 bps). The brokerage house has redistributed the remaining 40 bps to SBI Life.
PowerGrid Corp's robust performance, with a 69 percent return over the past year, is now trading at 2.4X FY2026 BV — a considerable premium compared to its fair multiple of around 1.5X BV. While historically viewed as a prime investment for India's electrification, current valuations seem to be reflecting the anticipated growth opportunities for the next few years, it said.
The brokerage house is reassured by Pidilite's strong earnings visibility in the thriving residential real estate up-cycle, expecting it to continue for the next few years. Pidilite's solid market position and potential weakening competition are factors contributing to this confidence. The company's profitability, despite recent price cuts and increased advertising and promotion spending, is considered comfortable.
Additionally, Pidilite's low risk of disruption sets it apart from other building materials products. Adhesives, a key product, are likely to remain B2C, unlike other building products that may transition to B2B as development trends shift towards larger projects by major developers, Kotak said.
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