Profit-Taking Indicates Healthy Market Behavior, Reflecting Concerns Over Overvalued Stocks and Leading to Substantial Corrections in Recent Sessions.
The steep decline in PSU stocks has resulted in significant wealth erosion for investors across the spectrum, particularly impacting the Government of India amid its efforts to enhance the valuations of state-run enterprises ahead of an ambitious disinvestment drive.
Over the last three sessions, government holdings in PSU stocks, which typically range from 30% to 90%, have witnessed a substantial shrinkage of approximately Rs 3.79 lakh crore. Institutional investors have suffered losses amounting to around Rs 93,590 crore, while non-institutional investors have seen market capitalization erosion of about Rs 45,300 crore. Individual holders, including those with combined holdings up to Rs 1 lakh and exceeding Rs 1 lakh, have collectively experienced a decline in their wealth by approximately Rs 36,440 crore during this period.
Prime Minister Modi Commends Public Sector Units’ (PSUs) Surge in Confidence During Rajya Sabha Address: Highlights 78% Increase in Net Worth since 2014.
Finance Minister Nirmala Sitharaman has reiterated the government’s unwavering commitment to bolster the valuation of Public Sector Units (PSUs), which historically have traded at discounts compared to their private counterparts. In a recent interview with Network18, Sitharaman emphasized the significant strides made in this regard, highlighting the enhanced market vibrancy, rising share prices, and improved dividends for public sector-listed companies.
Sitharaman underscored that the government’s objective extends beyond mere disinvestment; rather, it seeks to elevate the value proposition of PSUs and cultivate a positive market perception around them. She emphasized the importance of strategic reforms aimed at revitalizing the PSU landscape and positioning them as competitive players in the market.
Furthermore, Sitharaman elaborated on the government’s approach towards sectors deemed ‘core strategic,’ indicating a willingness to facilitate private sector entry while ensuring a minimal government presence. This strategic shift aligns with the government’s broader vision of fostering a conducive environment for private sector participation, while concurrently optimizing the role of PSUs in driving economic growth and development.
In the latest budget announcement, Finance Minister Nirmala Sitharaman revealed the government’s ambitious target of raising Rs 50,000 crore from stake sales in public sector companies during the fiscal year 2024-25. This objective comes on the heels of a revised divestment revenue target for the current fiscal year, which was scaled down to Rs 30,000 crore from the earlier projection of Rs 51,000 crore.
Key divestment targets for the fiscal year 2023-24, including IDBI Bank and CONCOR, encountered hurdles and were consequently put on hold. However, with divestment estimates for the fiscal year 2024-25 surpassing street expectations, there is a prevailing sense of optimism in the market regarding the potential realization of these targets in the upcoming fiscal year.
PSU stocks have been witnessing an upward trajectory since 2021, with the BSE PSU index showcasing gains for three consecutive years: 41 percent in 2021 (CY), 23 percent in 2022, and a notable 55.3 percent in 2023. This sustained growth underscores the resilience and attractiveness of PSU stocks in the market landscape.
Over the past three years, these stocks have emerged as substantial wealth creators for investors, showcasing remarkable performance. While some analysts advocate for the re-rating of state-owned companies, attributing their success to various factors such as strategic reforms and improved market sentiment, others are adopting a more cautious stance, expressing skepticism amid evolving market dynamics.
According to Rajesh Palviya, an analyst at Axis Securities, the recent profit-taking observed in the market is considered a healthy indicator, signaling a degree of discomfort with overvalued stocks. The sharp gains witnessed in certain stocks in recent sessions prompted significant corrections, with market sentiment swaying towards a more cautious stance. Despite concerns over high valuations, buoyant buying activity persisted, often overlooking underlying fundamentals.
Palviya predicts the possibility of 1-2 more trading sessions characterized by profit-taking, but anticipates a rebound once the market stabilizes at a certain level and exhibits broader health. He foresees a potential correction ranging between 5-10 percent, which could make the sector’s attractive valuations appealing to fresh buying interest.
However, some analysts caution that not all PSU stocks may regain momentum post-correction. They highlight specific themes such as railway, power, defense, and oil and gas, which enjoy high visibility and government support, as likely candidates to attract buying interest. Conversely, stocks lacking significant announcements may undergo a period of consolidation.
Analysts further said overall, the economy looks robust, suggesting a bullish market direction. Once the market recovers, PSU stocks may regain momentum. Those who bought at higher levels should wait for supply pressure to ease, assess their stocks, and consider averaging down in sectors with strong traction like defense and oil & gas, analysts added.