Rally in shares of energy PSUs amid risks defies logic, says Kotak Equities

Mumbai: Kotak Institutional Equities said the recent rally in shares of state-owned energy companies defies 'fundamental logic'.

"The recent sharp increase in stock prices of electric utilities and oil, gas and consumable fuels is quite odd in that regulated electric utilities and downstream oil companies will not benefit from higher energy prices," said the brokerage.

Kotak said earnings of electric utilities such as NTPC and Power Grid are regulated and linked to their equity base while that of downstream oil companies may be at risk if they are unable to raise retail prices of automobile fuels to pass on crude price rise.


"The combined wisdom of the market now believes that the aforementioned energy stocks are more valuable when nothing has changed for these companies on a fundamental basis," said the brokerage. "The usual casual narratives of catchup trade, liquidity, rotation are irrelevant when viewed in a more fundamental context."

Shares of NTPC and Power Grid Corp have gained 13% and 7% respectively in the past two weeks. On Monday, Power Grid shares ended down 0.1% at Rs 191.55. NTPC shares ended up 4.1% at Rs 145.55 even as the company denied reports of plans to raise Rs 15,000 crore through an initial public offering of three units.

The brokerage said it doubts much has changed for the oil, gas and consumable fuels companies such as Coal India and ONGC that benefit from higher energy prices in the short term. They still face an existential threat from renewable energy unless they can reorient business models.