BSE PSU index sinks 4%. Is the party over for these stocks?
India's state-owned companies witnessed a sharp downfall in trading, resulting in a 4% drop in the S&P BSE PSU index. Weak financial performance and profit booking following a recent uptrend in share prices are attributed to the decline.
Shares of Indian state-owned companies witnessed a sharp downfall in today's trading session, resulting in a 4% drop in the S&P BSE PSU index as of noon. This decline can be attributed to the weak financial performance reported by major companies so far, prompting investors to book profits following a recent sharp uptrend in share prices.
All 56 constituents of the PSU index are currently trading in the red, with SJVN emerging as the top loser with a nearly 19% drop due to its lacklustre performance in Q3. Following closely are NBCC (India), HUDCO, Mishra Dhatu Nigam, NHPC, Indian Overseas Bank, The New India Assurance Company, Engineers India, KIOCL, NLC India, General Insurance Corporation of India, and Punjab & Sind Bank, all experiencing drops of over 6%.
Additionally, railway PSU stocks, which have been significant wealth creators, are also witnessing a decline in today's session due to the underperformance in the December quarter. Shares of Rail Vikas Nigam, Indian Railway Finance Corporation, RailTel Corporation of India, Ircon International, and IRCTC are all trading lower, with declines ranging between 3% and 10% as of noon.
Banking stocks continued their weak performance following the RBI's sixth monetary policy meeting, in which the central bank decided to maintain the repo rate at 6.5% for the sixth consecutive time. Furthermore, the absence of cues from the RBI regarding future rate cuts is also impacting banking stocks.
Additionally, there are no imminent market triggers, as events such as the interim budget and the MPC meeting have concluded. At the same time, rate cuts from the US Fed have been further postponed against market expectations, which led investors to book profit in these stocks.
Robust rally in last one year
Over the past year, PSU stocks have gained favor on Dalal Street, demonstrating a significant rally, with many of them yielding multibagger returns. To put this into perspective, nearly 40 stocks from the S&P BSE PSU index have generated returns of over 100%.
The surge in PSU stocks was fueled by the government's significant increase in capital expenditure, with government-owned companies being the primary beneficiaries of this uptick. The rise in capex also positively impacted PSU banks, leading to a sharp increase in their corporate lending business.
Further, factors such as the rise in net interest income, expansion of net interest margins, and a decrease in provisions have also significantly contributed to the rally in banking stocks.
Railway, defence and power stocks have also rallied sharply over the last one-year period on the back of significant order wins.
Should you continue to invest in PSU stocks?
Analysts have maintained cautious optimism regarding PSU banking stocks and the overall PSU basket, considering their significant rise in value, which has led them to trade at relatively high valuations.
Mr Amit Goel, Co-Founder and Chief Global Strategist at Pace 360, said, "We saw some profit bookings following the MPC meeting, where the RBI maintained the status quo on interest rates. The decline in the broader PSU basket could be attributed to various factors, including profit booking, sector-specific concerns, and broader market sentiment."
He further pointed out that the current assessment suggests that the valuation of PSU stocks has reached a saturation point, becoming highly sensitive to any news developments. Even minor negative news could trigger a substantial correction of 10% or more within days.
There seems to be limited upside potential from the current levels, and it is believed that PSU stocks are nearing their long-term peaks, he added.
Sonam Srivastava, Founder and Fund Manager at Wright Research, said," The prospects for PSU banking counters seem cautiously optimistic, with factors like lower interest rates and potential government support boosting confidence. It's worth noting that PSU stocks often rally before elections due to expectations of policy continuity or reforms. Challenges such as macroeconomic headwinds and competition persist."
Regarding the overall PSU basket, she said," The broader trends remain uncertain due to factors like market volatility and potential profit booking. Whether recent gains signal a short-term correction or sustained growth hinges on various factors like global economic conditions and government policies. Thus, she emphasised that vigilant monitoring and thorough research are essential for navigating PSU stocks effectively."
"Historically, PSU stocks often rally before elections due to expectations of policy continuity or reforms. However, broader trends are influenced by factors like market volatility, regulatory changes, and economic indicators."
Sonam Srivastava advised that monitoring these factors closely can provide insights into the near-term trajectory of the PSU basket. Additionally, she highlighted the importance of conducting thorough research and staying informed about global economic conditions and government policies for making well-informed investment decisions amidst market uncertainties.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.
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