What drives NTPC and PSU oil stocks? Kotak says it’s all noise
The combined wisdom of the market now indicates that energy stocks are more valuable when nothing has changed for those companies in terms of fundamentals, Kotak said.
“We reject the usual catch-up trade, liquidity, and spin arguments because they mean nothing. They are causal explanations that reflect a desire to fit into a causal narrative. We have long argued that it there is no net buying or selling in the secondary market – someone buys, someone sells. Stock prices at any given time reflect the combined wisdom of the market, ”he said.
Kotak said the only possible reason for the recovery is a positive change in the consensus view of the market, but regulated electric utilities and downstream oil companies will not benefit from rising energy prices.
The profits of electric utilities such as NTPC and Power Grid are regulated and tied to their equity. On the other hand, the profits of downstream oil companies could be at risk if they are not able to raise retail prices for automotive fuels to pass on higher crude oil prices.
Kotak said that while retail fuel prices in the domestic market have risen sharply in the past 12 months, marketing margins for downstream companies have declined in recent weeks.
“For electric utilities, the market should consider higher discount rates due to the negative implications of rising energy prices on inflation and bond yields. Quasi-bond stocks such as NTPC and Power Grid should logically see their fair value drop. downstream oil companies from the potential risks of declining trade margins on automotive fuels. On a more fundamental basis, value is the discounted cash flows of the future (in perpetuity), ”he said.
Kotak said it would be interesting to see if investors can shut down the noise and sell stocks if they think the fundamental value of some stocks hasn’t changed or hold stocks for other reasons (bias such as endowment effect, loss aversion) or how they still find value in stocks even after the rally.
“We doubt that much has changed, even for the oil, gas and consumable fuel companies (COAL, CGSB) who benefit in the short term from rising energy prices. They still face the existential threat of renewables, unless they are able to reorient their business models. “said Kotak.