The conversation on valuation of stocks based on narratives becomes important in the context of increased retail investor participation in the market. 
| Photo Credit: HEMANSHI KAMANI

Stocks of companies in key sectors may be overvalued and disconnected to the performance of the companies at least in the short to medium term, according to analyst commentaries.

“The valuations of the market are expensive and of many ‘narrative’ stocks bizarre after the sharp recovery in the market in the past 4-5 weeks,” the authors said. The rally in railway stocks are an outcome of the general excitement in the small and mid cap (SMID) stocks. In a separate report on overvaluation in cement stocks, KIE (Kotak Institutional Equities) blamed “herd mentality” of analysts behind expensive valuations despite earnings estimates being cut continuously for 10 years. 

Speaking about the valuations, V.K Vijayakumar, Chief Investment Strategist at Geojit Financial Services agreed that retail investors were depending too much on stories to pick stocks. Giving defence as an example, he said, since government was the only producer and procurer for these companies, they cannot make high profit. “Operation Sindoor is making the story greater than it sounds,” he said.

Railways, although not a story, he found the prices of the stocks were going ahead of the fundamentals and disagreed with KIE’s view that cement stocks were overvalued.

The conversation on valuation of stocks based on narratives becomes important in the context of increased retail investor participation in the market. “Many of the ‘narrative’ stocks are largely owned by retail shareholders,” which may be behind their volatility said KIE. Moreover, a KIE report titled “Stuck!” said that promoters had reduced their holding in large and mid sized companies over the past 15-20 days. While KIE said that the narrative of Indian exceptionalism need to dampen, Mr.Vijayakumar maintained confidence in the “India growth story.”