PSU shares gauge sees worst day since pandemic amid stock market crash

The gauge tracking stock performance of public sector undertakings (PSUs) logged its worst fall in nearly four years on Wednesday amid carnage in shares of smaller companies.

The Nifty PSE index dropped 6.6 per cent — most since March 23, 2020 — with all 20 of its components ending with losses ranging between 4.2 per cent and 9 per cent. Several state-owned firms such as Railtel and Rites – that don’t form part of the PSE index — saw even deeper cuts of 20 per cent and 15 per cent, respectively.

Analysts said the PSU space had gotten overheated after relentless gains over the past year and was ripe for a course correction.

 

“The strong rally in PSUs across sectors without any meaningful change in the fundamentals or structural reforms in most sectors and the massive outperformance of PSUs versus private sector peers in the same sectors highlights the inherent flaw with the rally in PSU stocks. The rally is largely driven by top-down euphoria among non-institutional investors, rather than any bottom-up structural fundamental developments. Government ownership seems to be the only common factor for the performance of PSU stocks, with disparate sector- and company-specific fundamentals,” said a note by Kotak Institutional Equities (KIE).

The Nifty PSE index has nearly doubled over the past year, with several individual companies witnessing an even meteoric rise. Following the sharp gains, several PSUs had started commanding a valuation premium to their private sector peers. For instance, PSU metal stocks SAIL and Nalco are going at a premium to Tata Steel and Hindcalo on a one-year forward price-to-earnings multiple (P/E) basis.

KIE said there were three broad problems with the rally in PSU stocks. The first was the bullish pricing, profitability and volume assumptions, which resulted in over-optimistic medium-term earnings estimates.

“Incorrect valuation approaches to value earnings with unsustainable drivers and business models with questionable terminal value, and unrealistic narratives in several sectors related to government agenda, policies and regulations,” it said.

Last month, the share of PSUs in India's total market capitalisation surged to 17.3 per cent, marking the highest point in nearly seven years. A recent note by Elara Capital said the current setup draws parallels to the FY17 valuation, which preceded three years of negative performance.

“This leads us to our cautiously optimistic view, which is predicated on the belief that while the overarching bullish trend for PSU may moderate, there remain pockets of opportunity that can give a fresh leg up to the rally and deliver outsized returns,” it had said.