A combination of increasing inflows into sectoral funds through new fund offers (NFOs) and ‘forced’ deployment of such funds irrespective of prices and valuations have resulted in ‘price-insensitive’ bidding of stocks to unrealistic levels in several ‘narrative’ sectors, said Kotak Institutional Equities in its latest strategy note.
The brokerage made a list of stocks including Tata Power Ltd, Cochin Shipyard Ltd, Bharat Heavy Electricals Ltd (BHEL), NTPC Ltd, Power Grid and GAIL Ltd, among others, where it feels valuations are 'overvalued' relative to their business fundamentals and, therefore, up to 66 per cent downside is likely.
Among capital goods stocks, Kotak estimated a fair value of Rs 740 for Cochin Shipyard against Tuesday's closing price of Rs 2,060. This suggests a 64 per cent potential downside ahead for the defence stock. Kotak finds BHEL worth Rs 100 against Tuesday's closing price of Rs 298, suggesting 66 per cent downside ahead. Defence stock Bharat Electronics Ltd trades at Rs 301 but Kotak sees it at Rs 200 apiece, down 34 per cent.
In the utility space, Kotak values Tata Power at Rs 300 against its prevailing price of Rs 428. It has a target of Rs 265 for Power Grid (CMP: Rs 335), Rs 290 for NTPC (CMP: Rs 410), Rs 68 for NHPC (CMP: Rs 95) and Rs 312 for JSW Energy (CMP: Rs 733), suggesting 21-57 per cent downside.
For GAIL, Kotak has a target price of Rs 165, suggesting a 30 per cent downside ahead. For Petronet LNG, Kotak's target suggests a 36 per cent potential downside.
A total of 2.4 crore out of 4.7 crore total unique investors in domestic mutual funds have become investors through mutual funds after FY2021. Gross SIP inflows have averaged Rs 20,500 crore while net SIP inflows have averaged Rs 8,700 crore in the first seven months of 2024. Sectoral or thematic funds accounted for Rs 60,000 crore of Rs 1.12 lakh crore of funds raised in May-July 2024 by domestic mutual funds.
Kotak sees OMCs namely BPCL (down 24 per cent), HPCL (down 53 per cent) and IOC (down 37 per cent) falling up to 53 per cent. UltraTech Cement, Shree Cement and Ambuja Cements could fall 27-38 per cent, its fair value for the three stocks suggest.
The low liquidity in a number of these stocks has resulted in exaggerated trading in these stocks, Kotak said adding that the sustainability of flows and returns on these stocks may depend on a circular loop of continued strong trailing returns in these funds and continued large inflows into funds that invest in such sectors.