PSU stocks witnessed a massive selloff in the past two trading sessions, eroding over Rs 4 lakh crore in the market capitalization of all state-owned companies. The BSE PSU index, which tracks the performance of 56 PSU stocks, plunged 4.44% on Monday and 1.7% on Friday, underperforming the broader market indices. The index is now down 6.8% from its 52-week high of 18,854.85 points, which it touched on February 8, 2024.
What triggered the crash in PSU stocks?
The crash in PSU stocks was triggered by a combination of factors, such as:
- Disappointing Q3 results: Several PSU stocks reported weak earnings for the quarter ended December 2024, missing market expectations and raising concerns over their growth prospects. For instance, SJVN tumbled 25% after its net profit fell 51% year-on-year to Rs 280 crore. IRCON and Rail Vikas Nigam also slumped over 11% each as their revenues and margins declined. Coal India, ONGC, and NTPC also posted lower profits and revenues compared to the previous quarter.
- Profit booking: PSU stocks have been on a stellar run since 2021, driven by the government’s divestment push, reforms in key sectors, and attractive valuations. The BSE PSU index gained 41% in 2021, 23% in 2022, and 55% in 2023, outperforming the Sensex and the Nifty. However, after such a sharp rally, some investors may have decided to book profits and exit the sector, especially in the absence of any fresh triggers or positive news flow.
- Valuation concerns: PSU stocks are also facing valuation concerns, as some of them may have become overvalued after the recent surge. According to Bloomberg data, the BSE PSU index is trading at a price-to-earnings (PE) ratio of 14.6, which is higher than its five-year average of 12.4. Some PSU stocks, such as UCO Bank, the Central Bank of India, and the Indian Railway Finance Corporation, are trading at PE ratios of over 100, indicating stretched valuations.
- Market sentiment: The overall market sentiment was also weak on Monday, as the Sensex and the Nifty fell by 0.75% each, amid rising bond yields, inflation worries, and global cues. The midcap and smallcap indices also fell by 3% each, indicating a broad-based correction. The PSU stocks, being more volatile and sensitive to market fluctuations, were among the worst hit.
Which stocks were the top losers?
The selloff in PSU stocks was widespread, affecting almost all the sectors, such as banking, energy, railways, and defence. Among the BSE PSU index stocks, the top losers on Monday were:
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- Oil India: The oil and gas exploration company’s share price fell by 9.13% to close at Rs 173.65, after it reported a 7.8% decline in net profit to Rs 709.39 crore for the December quarter. The company also said that its crude oil production fell by 5.4% and natural gas production fell by 13.1% year-on-year.
- Steel Authority of India (SAIL): The steel maker’s share price fell by 7.63% to close at Rs 123.15 after it reported a 9% drop in net profit to Rs 1,468 crore for the December quarter. The company also said that its crude steel production fell by 8% and sales fell by 10% year-on-year.
- Rural Electrification Corporation (REC): The power finance company’s share price fell by 5.26% to close at Rs 156.55 after it reported a 37.7% decline in net profit to Rs 1,196.27 crore for the December quarter. The company also said that its revenue from operations fell by 3.4% year-on-year.
- Life Insurance Corporation of India (LICI): The insurance giant’s share price fell by 4.95% to close at Rs 494.80, after it reported a 6.7% decline in net profit to Rs 2,828.59 crore for the December quarter. The company also said that its total income fell by 18.6% year-on-year.
- NMDC: The mining company’s share price fell by 4.95% to close at Rs 156.80 after it reported a 4.7% decline in net profit to Rs 2,103.28 crore for the December quarter. The company also said that its iron ore production fell by 7.8% and sales fell by 1.8% year-on-year.
What is the outlook for PSU stocks?
Despite the recent crash, some analysts and experts believe that PSU stocks still have some steam left and may bounce back in the near future.
- Divestment potential: The government has set an ambitious divestment target of Rs 1.75 lakh crore for the fiscal year 2024–25, which may boost interest and demand for PSU stocks. The government has already announced its plans to sell its stake in several PSUs, such as Air India, BPCL, BEML, Shipping Corporation of India, and LIC. The divestment process may unlock value for the shareholders and improve the efficiency and profitability of the PSUs.
- Sectoral reforms: The government has also initiated several reforms in key sectors, such as power, coal, railways, and defence, which may benefit the PSU companies operating in these sectors. For instance, the government has announced a Rs 3.05 lakh crore package to revive the power distribution sector, which may improve the financial health and operational performance of the power PSUs. The government has also allowed private participation and foreign direct investment in coal, railways, and defence
sectors, which may increase the competitiveness and innovation of the PSU companies in these sectors. - Attractive valuations: Despite the recent rally, some PSU stocks are still trading at attractive valuations, compared to their peers and historical averages. According to Bloomberg data, the BSE PSU index is trading at a price-to-book (PB) ratio of 1.4, which is lower than its five-year average of 1.6. Some PSU stocks, such as NTPC, Power Grid, GAIL, and Hindustan Aeronautics, are trading at PB ratios of less than 1, indicating undervaluation.
Therefore, PSU stocks may offer a good opportunity for long-term investors who are looking for value, growth, and dividend income. However, investors should also be aware of the risks and challenges associated with PSU stocks, such as:
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- Policy uncertainty: PSU stocks are subject to policy changes and interventions by the government, which may affect their business operations and profitability. For instance, the government may impose price controls, subsidies, or taxes on the PSU companies, which may reduce their margins and returns. The government may also delay or cancel the divestment plans of some PSUs, which may dampen investor sentiment and expectations.
- Operational inefficiency: PSU stocks may also suffer from operational inefficiency due to bureaucratic hurdles, a lack of autonomy, and outdated technology. For instance, some PSU companies may face delays in project execution, cost overruns, and quality issues, which may affect their revenues and earnings. Some PSU companies may also face competition from private players, who may have better technology, innovation, and customer service.
- Market volatility: PSU stocks are also prone to market volatility, as they are influenced by various macroeconomic and geopolitical factors, such as interest rates, inflation, oil prices, and global cues. For instance, PSU stocks may react negatively to rising bond yields, which may increase their borrowing costs and reduce their valuations. PSU stocks may also react to any political or diplomatic developments, which may affect their business prospects.
Hence, investors should do their own research and analysis before investing in PSU stocks and select the ones that have strong fundamentals, growth potential, and a competitive edge. Investors should also diversify their portfolio and invest in PSU stocks with a long-term horizon, as they may witness short-term fluctuations and corrections.
How do I invest in PSU stocks?
Investing in PSU stocks can be rewarding but also risky, as they are subject to various factors and uncertainties. Therefore, investors should follow some basic principles and tips before investing in PSU stocks, such as:
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- Do your homework: Before investing in any PSU stock, investors should do their own research and analysis and understand the company’s business model, financial performance, growth prospects, competitive advantage, and future plans. Investors should also look at the company’s valuation metrics, such as PE, PB, dividend yield, and return on equity, and compare them with its peers and historical averages. Investors should also check the company’s governance and management quality and avoid investing in PSUs that have frequent scandals, controversies, or disputes.
- Diversify your portfolio: Investors should not put all their eggs in one basket and diversify their portfolio across different PSU sectors, such as banking, energy, railways, and defence. This way, investors can reduce their exposure to sector-specific risks and benefit from the growth potential of different PSUs. Investors should also diversify their portfolio across different market capitalizations, such as large-cap, mid-cap, and small-cap PSUs, as they may have different risk-reward profiles and performance patterns.
- Invest for the long term: Investors should invest in PSU stocks with a long-term horizon, as they may witness short-term fluctuations and corrections due to market volatility and policy uncertainty. Investors should have a clear investment objective and time horizon and stick to their plan, regardless of market noise and sentiment. Investors should also reinvest their dividends and capital gains to benefit from the power of compounding and enhance their returns.
- Monitor your investments: Investors should not ignore their PSU investments and monitor them regularly to track their performance and progress. Investors should also keep an eye on the news and developments related to the PSU sector and the specific companies they have invested in and assess their impact on their investments. Investors should also review their portfolio periodically and rebalance it, if necessary, to maintain their desired asset allocation and risk profile.
Conclusion
PSU stocks are an important part of the Indian stock market, as they represent some of the largest and most dominant companies in the country. PSU stocks offer a unique opportunity for investors who are looking for value, growth, and dividend income, as they are backed by the government, operate in key sectors, and trade at attractive valuations. However, PSU stocks also come with their own risks and challenges, such as policy uncertainty, operational inefficiency, and market volatility.
Therefore, investors should be careful and prudent while investing in PSU stocks and follow some basic principles and tips, such as doing their homework, diversifying their portfolio, investing for the long term, and monitoring their investments. By doing so, investors can reap the benefits of PSU stocks and create wealth in the long run.
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FAQs
Q: What are PSU stocks?
Ans. PSU stocks are the shares of public sector undertaking (PSU) companies that are owned or controlled by the government of India. There are over 300 PSUs in India, operating in various sectors such as banking, energy, railways, and defence.
Q: Why did PSU stocks crash in the past two days?
Ans. PSU stocks crashed in the past two days due to a combination of factors, such as disappointing Q3 results, profit booking, valuation concerns, and market sentiment. The BSE PSU index, which tracks the performance of 56 PSU stocks, plunged 4.44% on Monday and 1.7% on Friday, eroding over Rs 4 lakh crore in the market capitalization of all state-owned companies.
Q: Which PSU stocks were the top losers?
Ans. Among the BSE PSU index stocks, the top losers on Monday were Oil India, Steel Authority of India (SAIL), Rural Electrification Corporation (REC), Life Insurance Corporation of India (LICI), and NMDC. These stocks fell by 9.13%, 7.63%, 5.26%, 4.95%, and 4.95%, respectively.
Q: What is the outlook for PSU stocks?
Ans. Despite the recent crash, some analysts and experts believe that PSU stocks still have some steam left and may bounce back in the near future. They cite the following reasons for their optimism: divestment potential, sectoral reforms, and attractive valuations. However, they also warn of the risks and challenges associated with PSU stocks, such as policy uncertainty, operational inefficiency, and market volatility.
Q: How do I invest in PSU stocks?
Ans. Investing in PSU stocks can be rewarding but also risky, as they are subject to various factors and uncertainties. Therefore, investors should follow some basic principles and tips before investing in PSU stocks, such as doing their homework, diversifying their portfolio, investing for the long term, and monitoring their investments.
