Valuation adrift: Uncharted course of low-float PSU rally, shows data

10 PSUs, with public shareholdings below 14%, ride the current, rallying 76% to 4.5 times

A sharp run-up in shares of public sector undertakings (PSUs) with ultra-low public float has raised concerns about fair price discovery and possible manipulation.

The stock prices of the 10 PSU stocks with a public shareholding of less than 14 per cent have rallied between 76 per cent and 4.5 times in the past year.

So far this year, eight of them have gained more than 35 per cent, even as the National Stock Exchange Nifty Smallcap 100 has gained 7 per cent.

Analysts warn that low public shareholding makes these stocks vulnerable to price rigging, as manipulators can easily corner most of the available float. They say positive sentiment towards the PSU pack makes it fertile ground to trap retail investors.

Chokkalingam G, founder of Equinomics, says investors should track earnings growth and price-to-earnings (P/E) multiples to judge if the stock price upmove is backed by fundamentals.

“Traditionally, high valuations are justified based on earnings growth. In the current bull market, we should look for a P/E-to-growth (PEG) ratio of a maximum of 2. If not, one should book profits in smallcap and midcap stocks, including PSUs,” he said.

The PEG ratio takes into account the valuation of a company in relation to its earnings growth. It is calculated by dividing P/E by projected 12-month forward earnings forecasts.

However, as most PSUs with low float don’t have strong analysts’ coverage, it makes it challenging for investors to rely on accurate earnings growth forecasts.

As a result, market players say, often the rally is sentiment-driven.

Chokkalingam said if savvy investors start exiting due to excessive valuations, there will be no takers for the overvalued stocks.

“The current price and the entry price are important. If you are already in profit, booking some profits and monitoring the developments closely is a good idea. If not, investors should take an appropriate call based on their risk appetite,” said Deepak Jasani, head of retail research at HDFC Securities.

Most privately held companies are required to have at least a 25 per cent public float. However, certain PSUs are exempted from this rule. At present, of the 56 listed PSUs, only 38 have a minimum public shareholding of 25 per cent or more.

Four state-owned banks have a float of less than 10 per cent. As the government infuses capital into state-owned lenders, its shareholding goes up.

Meanwhile, Life Insurance Corporation of India, whose stock has rallied 75 per cent in the past year, has a public float of only 3.5 per cent.