The combined wisdom of the market now says energy stocks are more valuable when nothing has changed for these companies in terms of fundamentals, Kotak said.
By ETMarkets.com |
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NEW DELHI: Utilities NTPC & Power Grid and energy-related PSU stocks such as oil marketing companies might be seen as catchup plays these days, but Kotak Institutional Equities is not buying the argument. The brokerage says the rally defies fundamental logic.
The combined wisdom of the market now says energy stocks are more valuable when nothing has changed for these companies in terms of fundamentals, Kotak said.
"We dismiss the usual arguments of catchup trade, liquidity and rotation as they do not mean anything. These are causal explanations that reflect a desire to fit in a causal narrative. We have long argued that there is no net buying or selling in the secondary market — somebody buys, somebody sells. Stock prices at any given point in time reflect the combined wisdom of the market," it said.
Kotak said the only possible reason for the rally is a positive change in the consensus view of the market, but regulated electric utilities and downstream oil companies will not benefit from higher energy prices.
Earnings of electric utilities such as NTPC and Power Grid are regulated and linked to their equity base. On the other hand, earnings of downstream oil companies could be at risk if they are unable to raise retail prices of automobile fuels to pass on the increase in crude oil prices.
Kotak said while domestic retail fuel prices have increased sharply over the past 12 months, marketing margins of the downstream companies have declined in the past few weeks.
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"For electric utilities, the market should be looking at higher discount rates due to negative implications of higher energy prices on inflation and bond yields. Quasi-bond stocks such as NTPC and Power Grid should logically see a decline in their fair values. Same for the downstream oil companies from potential downside risks to their marketing margins on automobile fuels. On a more fundamental basis, value is the discounted cash flows of the future (in perpetuity)," it said.
Kotak said it would be interesting to see if investors can cut through the noise and sell the stocks if they believe the fundamental value of certain stocks has not changed or hold on to the stocks for other reasons (biases such as endowment effect, loss-aversion) or as they still find value in the stocks even after the rally.
"We doubt much has changed for even the oil, gas and consumable fuels companies (COAL, ONGC) that benefit from higher energy prices in the short term. They still face existential threat from renewable energy, unless they are able to reorient their business models," Kotak said.
