Shares of PSU stocks from defence, railway and NBFC sectors fell up to 6 per cent in across-the-board selling today, even as the benchmark indices Sensex and Nifty climbed on higher-than-expected Fed rate cuts. Analysts said many PSUs are trading at expensive valuations and, thus, are seeing price corrections, as focus shifts to other segments.
Only 4 out of 59 PSU index stocks were trading higher. Oil India plunged 5.92 per cent to Rs 559.55. Defence stock Hindustan Aeronautics Ltd (HAL) tanked 4.61 per cent to Rs 4,232 on BSE, as the BSE PSU index fell 1.5 per cent so far.
"The PSU basket has experienced an exceptional run in recent years, and many stocks are now undergoing a correction, which is natural and likely to continue," said Ajit Mishra - SVP, Research, Religare Broking Ltd.
BEML Ltd declined 4.95 per cent to Rs 3,564 while Bharat Dynamics Ltd and Cochin Shipyard Ltd also fell 5 per cent each. REC fell 4 percent to Rs 523.70 while PFC declined 3.5 per cent to Rs 473.80. Nalco, MRPL, HUDCO, IRFC, BHEL, GAIL slipped over 3 per cent each. Mazagon Dock Shipbuilders, SAIL, IRCON International Ltd, IRCTC also fell up to 3 per cent.
"Sectors such as defense, railways, and capital goods are trading at high valuations driven by expectations of strong earnings growth. Investors should exercise caution, as any shortfall in these expectations could negatively affect valuations," Mishra said.
Meanwhile, many PSUs come under midcap and smallcap segments, which were under pressure on Thursday as investors bet on largecaps.
"We continue to believe that style and sector rotation play a meaningful role in generating alpha. With a strong catch-up by midcaps and smallcaps in the last couple of months, we believe their margin of safety at current levels has reduced compared to largecaps. Keeping this in view, the broader market may see some time correction in certain pockets in the near term, and flows will likely shift to largecaps," said Neeraj Chadawar of Axis Securities.
Some market positioning is continuing to shift towards defensive names from the domestic cyclical in the near term, he said adding that largecap private banks, telecom, consumption, IT, and pharma provide more margin of safety in the near term.
"Midcap and smallcap segments, particularly sectors like defense, railways, and capital goods, which have performed exceptionally well over the past 2-3 years, are now witnessing a sharp correction. Valuations have long been a concern in the broader market, yet these stocks continued to rally despite being considered expensive. However, there always comes a point when market euphoria fades," said antosh Meena, Head of Research, Swastika Investmart.
Meena said domestic institutions have also shown signs of caution, holding significant cash reserves at elevated levels.
"I believe this correction could extend further, presenting a strong buying opportunity in high-quality stocks for long-term investors," he said.