Once-Lucrative State Firms Under Threat As India Loses Favour With Global Funds

Most stocks of India's sovereign-backed companies, including those from the railway and defence sectors, have entered a correction zone after a record-breaking rally, as foreign investors pulled out from the domestic market.

About 14 companies in India's Nifty CPSE Index have entered the correction zone—a fall of over 10% from one-year highs—while the other seven companies are trading 5% lower than their highs.

The plunge in these PSUs that were selling like hotcakes in the beginning of the year comes as global funds have been on a selling spree in the Indian stock market.

Foreign investors sold Indian stocks for the 12th consecutive day due to the revival of Chinese stocks and concerns about valuation. In the last 11 sessions, FIIs have offloaded domestic stocks worth over Rs 74,800 crore, according to provisional data from NSE.

During the same period, domestic investors mopped up stocks worth Rs 75,200 crore. It is, however, unclear if domestic investors have mopped up stocks in these PSU stocks.

The correction comes after the gauge of the public sector companies—Nifty CPSE—surged over 80% in the last 12 months mainly on the back of a growing order books benefitting from India's growth story.

Indian Railway Catering and Tourism Corp., NHPC Ltd., Steel Authority of India Ltd., Container Corp., Oil India Ltd. and Indian Railway Finance Corp. have entered the bearish territory—a decline of over 20% from their one-year high.

The recovery in PSU stocks is unlikely to be immediate and may require more time, according to Anwin Aby George, research analyst, at Geojit Financial Services. Over the past one to two years, these stocks have undergone significant re-rating due to an improved outlook, he said. "However, the recent rally did not meet execution expectations."

PSU stocks are trading at a slight premium compared to their long-term averages following this correction, George said. The long-term outlook of these stocks remains promising, fuelled by increased government spending focused on Amrit Kaal and a surge in domestic manufacturing, he said.

The benchmark indices, NSE Nifty 50 and BSE Sensex, have fallen by about 4.2% and 4.2%, respectively, in the last 12 days after the key gauges hit fresh highs. Nearly 40% of Nifty 50 stocks are in correction mode, according data collated by NDTV Profit.

Public sector undertakings have seen a phenomenal run in valuations over the last five years on robust earnings and the government's push to build infrastructure. The weightage of PSUs in Nifty 50 has increased from 8.02% in September 2019, to 9.53% now.

With the benchmark indices correcting by nearly 5% in the last 12 sessions, stocks in the railway and defence space have taken the most beating and have entered the bearish zone.

All of the railway stocks have declined over 20% from their one-year highs with Titagarh Rail Systems Ltd. and IRCON Ltd. falling by 41.1% and 36.3%, respectively.

In the previous cycle, which was consumption driven, PSU stocks had quite a little role to play, according to Alok Agarwal, Head - Quant & Fund Manager, Alchemy Capital Management. "With reasonable growth visibility, we expect these stocks to bounce back."

The government is clearly focused on the capex plans, and the data reflects that this year’s capex spending is likely to be back ended, Agarwal said. The recent pick-up in capex, along with recent corrections, may have improved the risk-return outlook, he said.

Defence stocks like Ideaforge Ltd. have plunged 88.09% from their highs, while Cochin Shipyard Ltd., and Garden Reach Shipbuilders & Engineers have tanked by about 43% and 40%, respectively.

The Nifty PSU Bank has declined 17% from its 52-week high. "A key driver of this drop is profit-booking by savvy investors, who have capitalised on the strong returns of PSU banks over the past 18 months," according to Sunil Damania, chief investment officer, MojoPMS.

Some PSU banks are now trading at price-to-book ratios comparable to their private-sector counterparts, which may limit their upside potential, Damania said. "The risk-reward may not favour PSU banks."