BSE PSU index crashes 20% from peak, enters bear territory: Turnaround likely or more pain ahead?

BSE PSU index: The gauge of index representing the public sector companies has entered into the bear territory, following a 20% crash from its all-time high touched in August last year.

The BSE PSU index settled the last trading session on August 29 at 18,319.45, down 20.41% from its all-time high of 23018.87. Meanwhile, out of the 63 index constituents, some 10 stocks have managed to gain over the last one year, while others have declined by up to 53%, with Punjab and Sind Bank emerging as the top laggards.

Meanwhile, other PSU stocks like Rail Vikas Nigam, Oil India, UCO Bank, Central Bank, REC and IREDA have lost between 40-49%, according to Trendlyne data.

What's behind the fall in BSE PSU index?

According to analysts, a host of factors have contributed to the decline in the PSU index and its constituents — earnings slowdown, profit taking and valuation concerns.

Vaibhav Vidwani, Research Analyst at Bonanza, said that the most significant factor behind the PSU index decline has been deteriorating earnings performance.

"The BSE PSU Index's consolidated profits fell by 2.3% in FY25, a sharp reversal from the 49% growth recorded in FY24. The earnings slowdown has been pronounced in the oil and gas sector. Major oil PSUs, including Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), Hindustan Petroleum Corporation (HPCL), and Oil & Natural Gas Corporation (ONGC), faced 20-40% profit declines," Vidwani said.

Meanwhile, she added that a critical support pillar for PSU stocks—government capital expenditure — has shown signs of weakness.

Actual government spending fell short of the FY25 budget estimate of ₹11.1 lakh crore. Capital expenditure by major central public sector enterprises and key government agencies declined 23% year-on-year in July 2025 to ₹53,406 crore in July 2024.

This slowdown has particularly impacted railway, defence, and infrastructure PSUs that depend heavily on government orders, said the Bonanza analyst.

Additionally, profit-taking in the PSU stocks after a breathtaking rally cannot be ruled out. The BSE PSU index has surged nearly 200% in the last five years, making the stock ripe for profit-taking.

After the tremendous rally in 2024, PSU stocks had reached stretched valuations, opined Vidwani. "The BSE PSU Index P/E ratio peaked at 14x in August 2024 before moderating to 11.2-11.86x currently. While this represents some correction, many individual PSU stocks were trading at extreme multiples, with companies like NTPC Green Energy, BHEL trading at trailing P/Es ranging from 150 to 252 times," shared the analyst.

She added that FIIs have been aggressive sellers of Indian equities in 2025, pulling out billions of dollars from Indian stocks. This sustained selling pressure, according to her, has particularly impacted large-cap PSU stocks.

Is a turnaround likely in PSU stocks?

The BSE PSU Index's 20% decline from peak reflects a confluence of earnings disappointments, valuation corrections, and external pressures.

While the near-term outlook remains challenging due to execution concerns and global uncertainties, the sector's long-term prospects appear intact, supported by India's infrastructure development needs and policy reforms, according to analysts.

"Despite the current challenges, there are reasons for cautious optimism. Expectation of maintained earnings in FY26 and improvement in FY27. Key sectors like power, defence, and banking are projected to benefit from policy tailwinds and improved execution capabilities. The government's continued focus on infrastructure development, defence modernisation, and public sector reforms provides a structural growth foundation for well-managed PSUs," said Vidwani.

Meanwhile, on technical terms, the PSU Index in the second week of May created a bullish gap in the 18,584–18,148 range, which has now been filled in the current session, said Anshul Jain, Head of Research at Lakshmishree.

"This zone coincides with a crucial support area, and any bullish price action here can trigger a short-term relief rally or a classic dead cat bounce. Over the past 54 sessions, the index has corrected by more than 9.29%, making it ripe for a technical rebound," he added.

However, Jain believes that sustainability will depend on follow-through volumes. Aggressive traders can watch this zone closely for reversal signals with strict risk management, he advised.

Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.