A total of 60 of 63 BSE PSU index constituents are down 20 per cent or above from their 52-week high levels, as the benchmark itself is off 21.48 per cent from its one-year high level on tapering of buying interest in the public sector pack. PSU stocks such as Chennai Petroleum Corporation Ltd (CPCL), Mangalore Refinery and Petrochemicals Ltd (MRPL), Cochin Shipyard Ltd, MMTC Ltd, ITI Ltd and Oil India Ltd have led the losers, falling 47-59 per cent.
Garden Reach Shipbuilders & Engineers Ltd, NMDC Steel Ltd, The New India Assurance Company Ltd, Ircon International Ltd, Engineers India Ltd, Mishra Dhatu Nigam Ltd, SJVN Ltd and Rites Ltd are some other big losers, plunging 43-45 per cent.
To be sure, the PSU weight in the NSE500 expanded from 8 per cent to 12 per cent between August 2023 and May 2024 period, which created a vicious chasing cycle. But the weight of PSUs has started dropping now and the pressure on fund managers to own PSUs has waned, Elara Securities said in a note.
The weight of PSU stocks in the NSE index bottomed at around 5.6 per cent in October 2020 from where it saw a gradual recovery as value trade revived globally. However, it was in 2023 when India saw a vertical rise in PSU weight to a high of 11.6 per cent, which forced many funds to realign their allocation after taking the initial hit on performance.
"The consensus chasing leg has already played-out here from where the PSU weight has started falling. It has now broken below the 1-year average for the first time since 2019. This could be an indication that the best outperformance for this pocket is over for now. With weights also falling, their will be no urgency among fund managers for buying PSUs," it said.
Hindustan Copper Ltd, Housing & Urban Development Corporation Ltd (HUDCO), IFCI Ltd, Indian Overseas Bank, UCO Bank, Indian Railway Finance Corporation Ltd (IRFC) and Steel Authority Of India Ltd (SAIL) shares are off 39-42 per cent from 52-week highs.
Container Corporation of India Ltd (Concor), Bharat Heavy Electricals Ltd (BHEL), Rail Vikas Nigam Ltd (RVNL), Indian Renewable Energy Development Agency Ltd (IREDA) and BEML Ltd are down by a similar percentage.
Elara finds a similar weak trend in PSU banks. Within the PSU banks, weight has started shifting back into SBI after 4-years. PSU banking weight ex-SBI increased sharply from a meagre 0.2 per cent in May 2020 to 1.3 per cent by May 2024. Elara said it is seeing a reversal here too with weight of other PSU banking stocks shifting back.
Kotak Institutional Equities in a note said several PSUs trade at extremely high market caps relative to their profits, net worth or assets. They include Bharat Dynamics Ltd (BDL), Cochin Shipyard, HAL, IRFC, IREDA, Mazagon Dock, NBCC, NHPC and RVNL, among others.
The BSE PSU Index is also breaking down for the first time since May 2020. Generally, any breakdown which is quickly followed by a strong recovery have indicated continuation of the uptrend.
"However, in case of a failed recovery after such break-down, we have seen trends getting dented. For E.g. in the 2004-2008 PSU rally, we saw the index breaking the support twice but the level was quickly recouped. Even in the current rally since 2020, we saw the support getting compromised in June 2022 (Russia-Ukraine crises) but again it recaptured the zone quickly," Elara said.
That said, the brokerage noted that the sensitivity has got lost, as the PSU pack saw one recovery but it failed after reversing to the support. These are strong signs of a slowdown in buying momentum, it warned.
Budget & capex
"During general election years, the central government’s capex spending tends to be back-ended and FY25 is unfolding in a manner reminiscent of such years. Core capex in transportation infrastructure (rail, road), housing, atomic energy and space surged till December 2024 and has now surpassed the spending rate seen in FY24, after lagging significantly in H1FY25. Transfer to states (loans for capex) has also outpaced last year’s rate; although defence capex has been soft, but we see no cause for alarm," ICICI Securities said in a note.
"With FY25 capex spends turning out to be skewed to the latter half of the year, FY26 capex spends could come out swinging in the first half itself – being a non-election year. On balance, we envisage strong government capex in H1CY25 despite an underwhelming budget allocation for FY26," ICICI Securities said.
Anand Rathi in a note said the strong fiscal deficit target has increased rate cut probability. PSU banks may benefit the most from Treasury gains on account of longer duration in their investment books, it said.