The PSU Rally- Could Another Ketan Parekh Jack Up Prices Now?

Q&A: Questions & Answers
1

Let me honestly confess that the PSU rally especially in the Railway stocks is making me jittery.
RVNL, IRCON, IRFC, you name them, and they are rising like crazy. Over the last few months many of them have doubled.

Same is the story of a few power stocks, say IREDA.

I am nervous because much of my portfolio consists of these.

There was a story on the CMBCTV18 which highlights that in many of these PSUs, the free float is very low. In some cases even 90% of the holding is with the President.

“As the 21st century dawned, Parekh was the reigning bull of the Indian markets. K-10 stocks—Pentamedia Graphics, HFCL, GTL, Silverline Technologies, Ranbaxy, Zee Telefilms, Global Trust Bank, DSQ Software, Aftek Infosys and SSI — which were so named since they were Parekh’s favourites, were on fire. The Pentafour bull, one of the many monikers for Parekh, would take advantage of the low liquidity in these stocks, and in collusion with the promoters, ramp up the stock prices.”

I remember, there was this public issue of Crest Communications. It was going for â‚ą35. My friend sold it for â‚ą300. It went to a few thousand. Today it is â‚ą1.05.

One man or was it a cartel, had manipulated the whole internet stocks related world. There was Hindustan Futuristic. And so many.

I had very little money at that time. I asked a broker about Reliance. She replied “Kyun gand kharidte ho (Why should you want to buy garbage?)” It was computer/internet and media nothing else.

I understand the Railways, Defence, Power PSUs were ignored. But going up 4 times? Is it the new normal? Is it different this time?

Similarity of the arguments frighten me.

What do you say?

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Well, I think you can’t compare these PSU stocks with the so called K-10 stocks. I mean, these are real companies, authentick profit making govt. companies and they do offer decent/high divident.
And as far as free flot goes, even if the majority of the shares are with the Prsident, the remaining portion are still pretty high (high equity base). A small group of people can’t manupulate these so easy. Or so I believe.
But yes, I agree the valuations are way above my expectation. I am slowly selling and regretting the next day. I sold 1000 IREDA toady (and sold the same qty earlier too, The idea was - will buy after the result. But here we go, the result doesnt justify this valuation, but we hit an UC today as well. Only consolation, I did sell those at 1 Rs below UC… hehe) and kind of expecting to regret on coming Tuesday.

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If you have joined late in the rally with FOMO, fears you have now are natural and you must seriously think to hedge or drastically reduce your position in stocks that has outrun its course. On the contrary if you are sitting with 2x to 4x profits, like in any investment decision, you can take some money out partially while the party is still on.

Not all PSUs are overvalued or have preformed as much as the stocks you have named. Stocks like ONGC/NTPC/Coal India/Power Grid/NMDC/PSU Banks still have legs in this PSU rally and cannot be manipulated as much its smaller peers.

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4

I think the main point with PSU rally is operational improvements and increased Profits… like NPA cleanup in banks have led to increased profit … same case with management changes in other psu’s… have created the rally… so now the question is until when it will go on :slight_smile: … i think the profits increasing is good thing … the issue comes with top line growth… psu’s will have very minimal top line/revenue growth compared private ones… and if profits are appropriate, prices will sustain but wont rally further if top line is not growing… thats the time to sell or take out initial investment atleast and leave the rest for dividend :smiley: …

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Look at these shares and and number of shareholders you will see massive delta between 2022-23 and today.

But in agreement on massive divergence between stock move and fundamental results. Is manipulation probable. Maybe. It is more of Retail Fomo. I beleive in next two years it will diverge again to the downside.

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Thanks. I have not entered late. Thats why the tremendous surge in their value is unnerving to me. I am sure many share holders have experienced this speeded up movie of turning of larva to butterfly before their eyes for the first time.
image

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I have gone through the messages posted here and only can grin on some comments canvassing for rise in PSU stocks. But all said and done, we know that such things happen in the market from time to time. Irrational exuberance is the time to be cautious. So if you find multifold return, you should take advantage of it and sell in step by step. Don’t expect Crest like figure from 30 to 3000 as PSUs have large capital base. So be watchful of the greed factor.
I am also astonished to see people buying stocks like IRFC @160, which is a finance company with EPS below 4. What is the expectation here ?

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You’re nervous cause it is a major allocation in your portfolio? You’d rather get 4x returns in 5 years, than in 1 year, even though in both the cases tomorrow a black swan can happen and take away the gains?

Why is that?

Since you invested in these companies in decent valuation, you should be the least worried, as once the tides turn you have a huge margin of safety to offload these companies on top of new entrants.

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9

No one knows the top of a stock, but still I fail to understand why someone would sell a stock with such a strong momentum like IREDA on a positive day.

If a stock price is falling and you sell makes sense, but why would you sell when it is rising like crazy? You’re trying to find it’s top and speculating that it will fall/correct. That’s wrong. I’d never sell a stock giving positive returns unless it turns around and be negative for 2 days minimum.

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PSU stock rally: Don’t bank on privatisation

Under its New Public Sector Enterprise Policy of February 2021, the government classified certain sectors as strategic for national security, energy security, critical infrastructure, etc. reasons.

These four broad sectors were :

(1)Atomic energy, space and defence;
(2)Banking, insurance and financial services;
(3) Power, petroleum, coal and other minerals;
(4) Transport and communication

Going by this above definition. , there are at least 75 listed PSU stocks displayed in the article along with its performance over the year…

I don’t think there is any other stocks left.:slightly_smiling_face:
Govt is a majority share holder in all these stocks.

So Govt may not go for any meaningful strategic divestment. yes, OFS, bonus, split , rights may continue. These stocks are cash cow for the Govt even if they sell 5-10 % through OFS every now and then for all the companies in rotation.

But there are various factor summarised for various reasons for the rally in a post link given below.
However , we should exercise caution in some Euphoric PSU counters which are beyond fundamentals. So In stead of chasing expensive high fliers, there are PSU stocks still available at reasonable valuation and there is scope for gain if Modi Govt wins and given the continuation of current Govt policy. it is no brainer.

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Steel Min suspends 2 SAIL, 1 NMDC directors on Lokpal’s directions

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I agree, someone might not sell when the move is like that crazy. But then again someone might sell to maintain the balance, you know, the greed. I dont see any logic behind this type of valuation in IREDA. I agree, the scope is huge, but it wont be achieved tomorrow. I will be not comfortable with a valution, which is already factored in the next 2-3 years growth.
Besides, there is other matter. I didnt get a chance to get in the initial phase and then it went out of my radar. I started buying at 118-119 level and the way down. so selling my top was to bring the avg down. Most of my buys are in the range of 101-107.
I am not saying I dont regret selling (it was wrong, as you said), believe me I do… but you know- “Bech ke pastao”

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Interesting, so you were uncomfortable with the valuations. Even I am concerned with valuation of most of the small-mid cap companies.

Think once that are you in the market to make money with a margin of safety, or to prove yourself right that you have valued a stock correctly? If your average price is far lower than CMP, and the stock is showing momentum Daily/Weekly then you shouldn’t sell.
An average of 100 puts you in a comfortable position in IREDA as per me. I made the first buy at 50 on pre-open and have averaged up since then at 86.

Coming to last point, there is no need to regret after selling, all this thinking need to be done before selling decision is made. Lost profits are not actual loss, only opportunity loss. I am sure you will have some free cash now and can find better opportunities :wink:

Ex: Times to be cautious with high valuations and Parabolic upmove

  1. Low free float: MMTC, IRFC
  2. Earnings not following up: Adani Total Gas
  3. You find other opportunities with same Reward and less risk!

In the end, it does not matter if you and I think a stock is undervalued, overvalued etc. Only when institutes have the conviction, and big money flows in, the companies will do well.

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one more thing that can give confidence to hold is… shareholding pattern… i do hold pfc rec nmdc etc (which were bought in the past for dividend purpose and now they are in 4-5 times )…and was eagerly waiting for shareholding pattern of Dec… and i do see 1% increase in FII holding which gives me some amount of confidence to still continue to hold for some more time…

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15

As I said, its all about the balance and mental model (which varies person to person). I am still holding most of it. Sold some, to reduce the risk a bit (by discarding the ones, which I bought at higher level), so that I hold the remaining with some more comforts. Ofcourse there was little hope that the price may corrects after the result and maybe I would get a chance to add more a bit lower level. Didnt happen… you win some loose some.
Well the regret part :slight_smile: I think it is Marwadi proverb- Bech ke pastao … hehehe its more relevant in this kind of crazy market, like there is no tomorrow.

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16

I sold my IRCON on Saturday. There seems to be consensus that railway stocks are over-heated and I do not want to lose sleep. It may continue to rise but I won’t regret it (much).

Still, continue to hold PFC and may even add more.

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17

Hi,

What is your rational for preferring PFC over other PSU power financers ?

thanks

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my understanding is purely based on PHILLIPCAPITAL INDIA RESEARCH report on power financiers…
Attached here…
Phillip_Capital_on_Power_Financiers_Decoding_the_surge_in_power.pdf (2.1 MB)

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19

Oh, you should have mentioned that earlier then :sweat_smile:
Selling the ones you bought at a higher price, and exiting partially are always good choices. Also, it becomes difficult to track multiple stocks, especially once they are are overstretched. It’s a good idea to reduce diversification in a hot sector (PSU), and track individual names.

I might also do this soon.

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Of course I love them faster. :grinning: But sometimes when it is too good, it seems too good to be true.