PSU share price bull run faces earnings risk

The impressive surge in India’s state-owned companies might perhaps falter due to waning earnings momentum and indications from technical analysis that the current run is seemingly prolonged.
According to statistics published by Bloomberg, companies in the BSE PSU Index exceeded analysts’ estimates by only 1% in the three months ended December, which was the weakest rate in six quarters. That’s insufficient to explain a surge that saw the gauge reach a new high on Thursday and more than quadruple the measure’s market value to $750 billion over the previous year.

Reward vs risk is not particularly favorable, therefore avoid betting on a large-scale rise.It’s time to start exercising selectivity, according to analyst Ruchit Jain of the brokerage 5Paisa Capital Ltd. The market is overbought on a number of indicators, so investors should hold off on making short-term optimistic predictions.

A number of state-owned stocks’ recent results provide scant encouragement. Power company SJVN Ltd., which made a shift to renewable energy, saw a 65% increase in value in the month before its results were revealed last week. However, it also revealed a 53% decline in third-quarter net income and failed to meet analyst expectations.

Similar to this, Rail Vikas Nigam Ltd.’s shares increased by more than 50% in the month before its results announcement on Thursday, although the business revealed lower profits.
To be sure, given the government’s growing infrastructure investment and emphasis on maximizing value of state assets, Jefferies believes that the continuing “re-rating” of state enterprises has more legs.

In a note on Tuesday, Jefferies analyst Mahesh Nandurkar said, “Governance improvements could drive longer-term rerating.” According to him, return on equity for state-owned businesses is expected to increase further after rising to 12–13% from multi-year lows of 4-6%.
As a measure of price momentum, the PSU index’s relative strength index is now at its highest point in more than 20 years. As a result, the gauge is ready for a selloff similar to the one that earlier this week destroyed around $57 billion in market value.

According to Sanjeev Prasad, co-head of institutional equities at Kotak Securities Ltd., “the market is overly focused on near-term profitability, while ignoring the large downside risks to medium-term profitability,” in a note last week. “We find it difficult to accept the new narrative being promoted by the market.”