(Bloomberg) — The sizzling rally in India’s state-owned firms may be at risk of sputtering as earnings momentum fizzles and technicals show the run is now looking stretched.
Most Read from Bloomberg
Companies in the BSE PSU Index beat analysts’ expectations by a mere 1% in the three months ended December, the slowest pace in six quarters, according to data compiled by Bloomberg. That’s not enough to justify a rally that sent the gauge to a fresh record on Thursday, and has more more than doubled the measure’s market value to $750 billion in the past year.
The “risk-reward is not very good so don’t bet on a broad rally. It’s time to become selective,” said Ruchit Jain, an analyst at brokerage 5Paisa Capital Ltd. “Many indicators are quite overbought for this space and investors should avoid taking bullish calls in the short-term.”
Recent earnings of several state-owned stocks offer little support. Power utility SJVN Ltd., which pivoted toward renewable energy, rallied 65% in the month leading to its results announcement last week, but reported a 53% drop in third-quarter net income and missed analysts’ estimate.
Similarly, Rail Vikas Nigam Ltd.’s shares jumped over 50% in the month leading to its earnings report on Thursday, only for the company to report a decline in profits.
To be sure, Jefferies sees the ongoing “re-rating” of state firms as having more legs, given the government’s rising infrastructure spending and focus on maximizing value of state assets.
“Governance improvements could drive longer-term rerating,” Mahesh Nandurkar, strategist at Jefferies wrote in a note Tuesday. Return on equity for state companies is set to improve further after having recovered to 12-13% from multi-year lows of 4-6%, he said.
For now, the PSU index’s relative strength index — a gauge of price momentum — is at the highest level in more than two decades. That leaves the gauge ripe for the kind of selloff that erased about $57 billion in market value earlier this week.
“Market is overly focused on near-term profitability, while ignoring the large downside risks to medium-term profitability,” Sanjeev Prasad, co-head of institutional equities at Kotak Securities Ltd. wrote in a note last week. “We find it hard to subscribe to the market’s new narrative.”
–With assistance from Akshay Chinchalkar.
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.