PSU Stock Slump Continues

PSU Stock Slump Continues: Market Down for Second Straight Day

The downward spiral of public sector undertaking (PSU) stocks continued for the second consecutive trading session on Tuesday, a trend ignited by the election results that deviated from the expectations set by exit polls. This bearish streak has cast a shadow over a sector that had previously basked in the limelight of investor optimism.

In recent years, PSU stocks have captivated investors' attention, primarily due to the government's emphasis on initiatives like Make in India, ramping up capital expenditure, and revitalizing the banking sector. These efforts have propelled PSU stocks to unprecedented heights, leading them to trade at elevated valuations. Despite the soaring prices, investors had not relented, anticipating a strong mandate for the BJP and a continuation of robust capital expenditure, further benefiting these stocks.

The Unexpected Turn: Election Results Defy Expectations

However, the actual election results took an unexpected turn, deviating significantly from the predictions of exit polls. Official results revealed that Modi's Bharatiya Janata Party (BJP) secured 240 seats in the general election, falling short by 32 seats of the halfway mark in the 543-member lower house. Despite this shortfall, the BJP is highly likely to form a government with the support of its allies. Nevertheless, investors are concerned about the potential impact on policy stability, leading to a sharp decline in Indian stocks, with PSU stocks bearing the brunt of the downturn.

Meltdown Continues: Intraday Trading Woes

During Tuesday's intraday trading, the BSE PSU index witnessed another significant decline of 4.5%. Bharat Dynamics, a potential multi-bagger, hit its 10% lower circuit limit for the second day in a row, trading at ₹1,293 per share. Similarly, another PSU gem, NBCC, dropped 7% to ₹127 apiece. Other notable PSU stocks like Indian Bank, Cochin Shipyard, Engineers India, Mishra Dhatu Nigam, and IRFC traded with losses ranging between 2% and 5%.

On the positive side, Mazagon Dock Shipbuilders staged a strong rebound, registering an impressive 8% gain following a 15% decline in the previous session. Likewise, NALCO, Hindustan Copper, SAIL, Container Corporation, ONGC, HUDCO, and NMDC witnessed gains between 3% and 6.5%, recovering sharply from the previous day's slump.

Indices Regain Footing

When writing, the BSE PSU index had rebounded from its intraday low and was trading with a gain of 0.60% at 19,078 points. Similarly, the Nifty PSE index, which experienced a 20% decline in the previous trading session, showed a modest gain of 0.60% at ₹9,498 points. The Nifty PSU Bank basket also traded with a slight gain of 0.10% after the sharp decline observed in Monday's session.

Market Outlook: Volatility and Sectoral Shifts

Commenting on the market's performance, Dr V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said, "The market will take some time to absorb the unexpected election results. Stability will return soon, but volatility will continue until there is clarity on the cabinet and the key portfolios."
Vijayakumar further added, "A sharp rebound in the market is unlikely in the near term, but sectoral preferences might change. Sectors like FMCG, healthcare, and IT will find increasing preferences, and the momentum will slow down. One positive of the sharp market correction is that the excessive valuations have moderated a bit, which will facilitate institutional buying once clarity emerges on the formation and composition of the cabinet."

Investor Advice: Nibbling at Quality Stocks

Amidst the volatile market environment, Vijayakumar advised investors to "start nibbling at high-quality large-caps in IT, financials, autos, and capital goods." This strategy suggests taking advantage of the market correction to accumulate stocks in sectors potentially benefiting from the new government's policies and priorities.
As the dust settles on the election outcome, the market's focus will shift toward forming the new government and its policy directions. This clarity will be crucial in shaping investor sentiment and determining the future trajectory of PSU stocks and other sectors. Until then, investors are advised to exercise caution and selectively accumulate quality stocks in sectors that might align with the new administration's agenda.