Rally in PSU energy stocks defies logic, no fundamental change: Kotak Institutional Equities

The recent rally in some of the energy-related PSU stocks defies logic, as there is no positive fundamental change whatsoever for regulated utilities and downstream oil firms, brokerage Kotak Institutional Equities said in a note dated October 4.

Even companies that benefit from higher energy prices in the short term face an existential threat from renewable energy players unless they are able to reorient their business models, it said.

Kotak cited the example of power generator NTPC, whose earnings are immune to movements in energy rates, to dig deeper into the jump in the space.

Let's take a look at how some of these stocks have performed lately:

NTPC has risen more than 10 percent in the last week. At the same time, BHEL has risen 9.4 percent, while NHPC and Power Grid have added 6.4 percent and 3.3 percent to their value.

Comparing NTPC and Power Grid, the brokerage said the earnings of both electric utilities are regulated, and both are quasi bond stocks - which means their value falls with higher yields - whose fair value should decline. The recent jump in the stocks of electric utilities, and oil, gas and consumable fuels is "quite odd", according to Kotak.

It also said the earnings of downstream oil companies may be at risk if they are unable to increase retail prices to pass on the gain in crude rates to the consumer.

In the last month, Indian Oil and HPCL have returned 14-15 percent to investors, but BPCL has declined almost 10 percent.

Domestic retail fuel prices have increased sharply over the past 12 months, and downstream companies' marketing margins declined in the past few weeks, according to the brokerage.

"The usual casual narratives of catch-up trade, liquidity and rotation are irrelevant when viewed in a more fundamental context... We have long argued that there is no net buying or selling in the secondary market - somebody buys, somebody sells," said Kotak Institutional Equities. Stock prices at any given point in time reflect the combined wisdom of the market, which now indicates that these companies are more valuable when nothing has changed for them fundamentally, it added.

Meanwhile, oil and gas prices have jumped in the recent past. Crude oil rates are near their highest levels in years, with benchmark Brent futures near the $83 per barrel mark. Domestic gas prices have been raised by 62 percent for the six months ending March 31.

Here's how the market has performed in the past year viz-a-viz oil & gas, energy and public sector enterprises baskets:

Market expert Mehraboon J Irani sees more value ahead in PSU stocks, including the oil & gas pack. He has a positive outlook on crude oil and gas prices at the current juncture.

His favourite pick in the space is ONGC.