Kotak institutional Equities in its latest research note said many 'narrative' stocks including PSUs such as BHEL Ltd, NTPC Ltd, Cochin Shipyard Ltd and Bharat Electronics Ltd are overvalued relative to the fundamental value of their businesses, with the prevailing valuations baking in optimistic profitability and volume assumptions.
The brokerage said it does not find much value in most parts of the market with valuations of most sectors and stocks at fair, full or frothy levels. Most of the investment stocks are in the full-to-frothy category, outsourcing shares in the fair-to-full category while the financial stocks seem to be in the reasonable-to-fair category, it said.
"We find the valuations of the ‘narrative’ sectors and stocks extremely rich or frothy. We note large potential downside to our 12-month fair values for covered stocks and are extremely puzzled by the frothy valuations of several non-covered stocks," it said.
Kotak said ‘narrative’ stocks across market capitalisations and sectors have corrected sharply in the past 3-6 months while showing limited downgrades to FY2025 and FY2026 consensus Ebitda and EPS estimates. "It seems that the market has started questioning the narratives underpinning such stocks," the broking firm said.
Kotak said only 26 per cent of stocks under its coverage, including 11 per cent BFSI and 15 per cent for non-BFSI stocks, have more than 10 per cent potential upside to their 12-month fair values. Besides, only 31 per cent of stocks that Kotak covers are trading below their historical 10-year averages.
Kotak has a fair value of Rs 110 for BHEL, which suggests a 56 per cent potential downside ahead, the brokerage suggested. Cochin Shipyard's fair value estimate at Rs 800 hints at 52 per cent potential downside. Kotak's target for Dixon Technologies at 8,430 suggests 50 per cent downside. It sees JSW Energy's fair value at 49 per cent lower than the prevailing stock price at Rs 330. The brokerage sees HPCL falling 47 per cent to Rs 200 level. For UltraTech Cement, it has a target price of Rs 6,900, down 41 per cent. Capital goods stocks such as CG Power and Siemens, cement stocks Ambuja Cements and Shree Cement, utilities such as Tata Power, NTPC, Power Grid and NHPC are seen falling up to 39 per cent.
Kotak suggested fair values for oil stocks such as IOC, Oil India and BPCL, which is up to 28 per cent lower than the prevailing stock levels. Kotak said Nifty, Nifty Midcap 100 and Nifty Smallcap 100 have fallen 7 per cent, 6 per cent and 4 per cent from their peak levels due to either earnings downgrades and sharp earnings misses in 2QFY25 results in the consumption-related sectors and narratives being questioned in a few ‘story-dominated’ sectors.