‘Narrative’ stocks in sectors such as capital goods, defense, electricity, EMS, railways, renewables and PSU sectors are trading at ‘unfathomable’ multiples ahead of exit polls and election outcome. Kotak Institutional Equities said such stocks are precariously positioned with their frothy market capitalisations and valuations supported by a combination of optimistic assumptions and ‘rich’ multiples based on incorrect valuation methodologies.
“The stocks could see massive correction (as much as 50-75 per cent in many cases) if and when the market was to take a more realistic view of the prospects of such companies. However, the current ‘euphoric’ state of affairs could continue for a while, resulting in continued large disconnect between their market prices and fundamental fair values,” it said.
Kotak, which sees a comfortable majority for BJP, said the market could be significantly disappointed if BJP wins about 250 seats and NDA 300-plus (still in power). In such a scenario, it expect a meaningful correction in many of the ‘narrative’ stocks, even as it feels major indices may hold up reasonably well, as the market will likely understand eventually that not much will change for several sectors such as banks, consumers, IT services, pharmaceuticals, etc. These sectors have a high weight in the usual market (Nifty50, MSCI India) indices, it said.
Th brokerage said 325-plus seats for BJP and 375-plus seats for NDA would be viewed quite favorably by the market, as it will boost expectations of acceleration in economic reforms, major policy changes and administrative reforms, and privatisation of PSUs. Election results are due on June 4 and exit polls will be available from the evening of June 1, the brokerage noted.
The market would be slightly disappointed if BJP gets just over 300 seats, said Kotak, even as it does not see any major changes to the government’s economic and social policies.
The brokerage said it is pointless trying to figure out the factors that could result in a more fundamental view of the stocks among market participants. Most of the stocks are so egregiously overvalued and on such absurd ‘logic’ that it is impossible to even try and figure out the faith behind the exuberance behind the stocks, it said.
“We note the dogmatic faith in such stocks reflects high return expectations from such stocks, which in turn reflects large returns in the market and mid- and small-cap. stocks seen over the past 1-3 years. The unwavering faith has translated into strong inflows into domestic equity mutual funds, which has further propagated the ‘virtuous’ cycle of flows and returns,” it said.