Will PSU Stocks Rebound After a 25% Decline?

PSU stocks, which saw a sharp bull run during Monday’s trade, tumbled swiftly in today’s session as the actual vote count painted a different picture than exit polls, which had projected a clear victory for the BJP-led NDA in the 2024 Lok Sabha election.

As a result, the BSE PSU index plummeted by nearly 16% today, closing at 18,964 points. Top losers in this sector included REC, PFC, and Bharat Heavy Electricals, each experiencing losses of up to 25.19%. Nearly 52 stocks within the index ended today’s session with losses ranging between 10% and 20%.

PSU and capital goods stocks had been on an upward trajectory, fueled by initiatives such as Make in India, increased capital expenditure, and the government’s focus on revitalizing the banking sector. These sectors have performed robustly in recent times. However, concerns about political continuity have impacted investor sentiment, leading to a sharp decline in these stocks.

Recent data shows that Indian Prime Minister Narendra Modi’s alliance is on track for a majority in the ongoing general election vote count on Tuesday. However, the current numbers suggest that the margin of victory might be smaller, indicating that Prime Minister Modi may need to run a coalition government for the first time. Market sentiments soured on this expectation, as policy-related decisions in a coalition government cannot be made by the BJP alone. Coalition partners would need to agree, raising concerns about potential delays and compromises in decision-making, a scenario not prevalent over the past decade.

“It is likely that Narendra Modi will return as PM for a third term. However, he will have to contend with changed circumstances. First, the BJP will be dependent on regional allies like Telugu Desam and Janata Dal (Secular) and make policy adjustments accordingly.”

“Second, there will be greater demand to stimulate consumption in the economy from both the BJP and its allies. There is an outlier possibility that the opposition could form the government if some of the BJP’s existing allies cross over. We think that would be unlikely,” said Emkay Global Financial Services.

In terms of market outlook, the brokerage foresees a short-term market derating, as the perceived risk associated with India has increased. According to Emkay’s perspective, PSU and capital goods sectors appear to be the most vulnerable, prompting the brokerage to advise against investment in these sectors for the time being. Conversely, the brokerage anticipates a resurgence in consumption, particularly in FMCG and value retail segments. Additionally, a positive outlook is maintained for the healthcare sector.