Nifty PSE off its all-time high; what's worrying the investors?

In the past two months, major PSE index constituents are experiencing profit booking. Here's how analysts view the space

Public sector companies' stock which were once the darlings of the Indian markets are now on a downward trajectory. The Nifty PSE index which tracks the performance of Indian public sector enterprises on the NSE has fallen off its all-time high and has lost over 3.8 per cent as compared to the Nifty 50's decline of 1.5 per cent. 

In the past two months, major Nifty PSE index constituents saw a profit booking. Among individual stocks that comprise the index, NMDC, Steel Authority of India (SAIL), IRCTC, Bharat Heavy Electricals (Bhel), NHPC, Container Corporation of India and Hindustan Aeronautics (HAL) have lost up to 61 per cent, ACE Equity data shows.

 

Some of the other prominent losers include Life Insurance of India (LIC) and Indian Oil Corporation (IOC) that have slipped over 12 per cent each, Bharat Electronics (BEL) and Power Finance Corporation (PFC) that have slipped around 10 per cent, data suggests. 

Similarly, REC, Oil India, NTPC, Power Grid, ONGC, and GAIL declined between eight to three per cent from their life high.

What led to a spike in the PSU/PSE stocks in the past?

Among the lot, PSU banks' story was a remarkable turnaround, said analysts at Geojit Financial Services, from losses of Rs 87,000 crore in FY18 to record profits of Rs 1.4 trillion in FY24. This, their analysts said, turned PSU banks from untouchables’ to darlings of investors.

PSU stocks of railways and defence companies got a boost from the spike in government capital expenditure, which doubled in the last five years from around Rs 5 trillion to Rs 11.11 trillion in the last budget. 

What is dragging the public sector company stocks now? 

PSE stocks taking a breather:

Analysts believe that there was a very sharp run in the last couple of years in PSU stocks, which could be one of the possible reasons for some breather PSU stocks are taking. 

"In the last two years, PSU stocks have gone up due to strong performance, government reforms, and a significant capital expenditure push from the government. Stocks from the railways, power utilities, power financiers, defense, shipbuilding, and public sector banks have seen rerating during this period," said Tapan Doshi, a Sebi registered research analyst and founder of Thoughtful Investors Hub (TIH). 

Growing uncertainty around the upcoming state elections:

Growing uncertainty around the upcoming state elections, said, Varun Saboo, Head - Equities, Anand Rathi Shares and Stock Brokers, is another possible reason for the Nifty PSE pack seeing slightly higher correction than Nifty 50 index.

Shift towards value pick:

Given the sharp run up in these stocks and the current market environment, analysts believe investors are now shifting towards value picks, which is another reason for the decline.

What lies ahead for the PSU/PSE stocks? 

Geojit's V K Vijayakumar said, "The growth prospects of these PSU railways and defence companies are bright but the valuations of stocks in these segments have run ahead of the fundamentals."

Meanwhile, Anand Rathi Shares and Stock Brokers' Saboo has maintained a neutral stance on the PSE/PSU stocks. 

Doshi expects the PSE Index move up / recover going ahead, but not at the 47.3 per cent compound annual growth rate (CAGR) that it used to get in the last three years. He expects a decent return of 13 per cent to 15 per cent can be expected in the future.

Also, as per him, only PSUs with moats, having high capital efficiency, strong balance sheets, good profit, and good cash flows can sustain themselves in the future.

Additionally, Doshi believes that after the cease-fire talks, the Israel-Hamas conflict is expected to end which may impact Brent crude oil. This can impact PSU oil & gas stocks, which in turn will have a bearing on the Nifty PSE index.