Adani Power, BHEL, HAL, REC, PFC, Titagarh shares: Why MFs sold defence, railways, power stocks in June

Mutual funds (MFs) were seen trimming stakes in many defence entities, railway firms, PSU banks and power sector players post Lok Sabha elections, where the incumbent BJP fell short of simple majority but managed to claim third term with the support of NDA allies. Domestic funds cut exposure to these sectors, probably on concerns over rich valuations, as hopes are still running high that these sectors could emerge as beneficiaries of Union Budget 2024 scheduled for July 23.

MFs sold 40 lakh shares of Hindustan Aeronautics Ltd (HAL) in June and were left with 2.61 crore HAL shares at the month end against 3.03 crore shares at May end, down 42 lakh shares. The net value of HAL shares that MFs sold stood at Rs 2,218 crore, as per IIFL.

Another defence stock Bharat Electronics Ltd (BEL) saw Rs 2,149 crore worth of MF selling in June, as the institutional category sold 7.03 crore BEL share during the same period mentioned. MFs held 76.34 crore BEL shares at June end against 83.37 crore shares at May end.

Power Finance Corporation (PFC) and REC, two power finance PSUs, saw selling to the tune of Rs 1,075 crore and Rs 809 crore, respectively. Bharat Dynamics (BDL) from defence and Adani Power from power sector saw selling worth Rs 702 crore and Rs 629 crore, respectively. Defence players Solar Industries and BHEL also saw MF selling, so does wagon maker Titagarh Railsystems.

While capex-heavy sectors, such as aerospace & defence, capital goods and PSU banks led the rally post the Interim Budget until the election results, focus of the market post-election results shifted to consumption with FMCG stocks contributing 5 per cent to overall Nifty movement over that period, Elara Securities said.

Yet, "the key outperforming sectors like defence and railways are trading at all-time high valuations, moving up the momentum based on order inflows and positive sentiments. We expect some time and price correction into these sectors from current levels. The focus would move to stocks that saw underperformance and could catch up over the next few months," Reliance Securities said in a note.

Kotak said valuations of many PSU stocks to be quite bizarre, when compared with their fundamentals (see Exhibit 13). Most of these companies trade at very high P/E, P/B or EV/assets, and many have not seen any meaningful improvement in their fundamentals; some make losses. "Some of these companies will require extraordinary assumptions and a massive turnaround in their operations (and financials) to justify their current market caps."

Bharti Airtel (Rs 1,604 crore), State Bank of India (Rs 1,480 crore) and ICICI Bank (Rs 1372 crore), meanwhile, also saw heavy MF selling in June.