Govt loses Rs 3.8 trillion wealth in PSU stocks crash days after setting tall divestment target

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The sharp fall in PSU stocks has caused significant wealth erosion for investors across the board, but especially for the Government of India, which is looking to improve valuations of state-run enterprises, going into an ambitious disinvestment drive.

The government holdings in PSU stocks, ranging from 30-90 percent, have shrunk by around Rs 3.79 lakh crore in the last three sessions. While institutional investors lost around Rs 93,590 crore, non-institutional investors saw market cap erosion of about Rs 45,300 crore; and individual holders (with combined holdings of both up to Rs 1 lakh and exceeding Rs 1 lakh) saw their wealth decline by about Rs 36,440 crore in the last three sessions.

On February 7, Prime Minister Narendra Modi praised the growing public confidence in public sector units (PSUs) under the BJP-led NDA government. In his Rajya Sabha address for the Motion of Thanks to the President's speech, PM Modi highlighted a 78% increase in the net worth of India's PSU companies since 2014, now exceeding Rs 17 lakh crore compared to Rs 9.5 lakh crore in 2014. He also noted a rise in the number of PSUs from 234 to 254 since 2014, with their shares yielding favorable returns.

Finance Minister Nirmala Sitharaman also recently emphasized the government's commitment to boost the valuation of PSUs, historically traded at discounts to private counterparts. In an interview with Network18, Sitharaman highlighted improved market vibrancy, rising share prices, and enhanced dividends for public sector listed companies. She stressed the goal is not just disinvestment but to increase their value and ensure a positive market perception. Sitharaman also mentioned allowing private sector entry into "core strategic" sectors, with the government aiming for only a "minimal presence" in these areas.

In the latest budget, Finance Minister Nirmala Sitharaman announced the government's target to raise Rs 50,000 crore from stake sales in public sector companies in fiscal 2024-25. The Union Budget for the current fiscal year revised down the divestment revenue target to Rs 30,000 crore from Rs 51,000 crore. IDBI Bank and CONCOR were key divestment targets for FY24, but faced obstacles and were put on hold. With divestment estimates for FY25 exceeding street expectations, there is optimism in the market that these targets will be achieved in the next fiscal.

PSU stocks have been on an upward trend since 2021, with the BSE PSU index experiencing gains for three years in a row: 41 percent in 2021 (CY); 23 percent in 2022, and 55.3 percent in 2023.

These stocks have proven to be significant wealth creators for the investors in the past three years. While some analysts justify the re-rating of state-owned companies, others are now turning skeptical.

"This profit-taking is a healthy sign for the market, reflecting discomfort with overvalued stocks. The recent sharp gains in certain stocks led to substantial corrections in the last few sessions. Despite market discomfort with high valuations, euphoric buying persisted, overlooking fundamentals. December quarter earnings revealed profitability contractions in some midcap PSU stocks, prompting caution," said Rajesh Palviya, analyst at Axis Securities.

Palviya expects 1-2 more trading sessions of profit-taking, but a rebound is likely once the market settles at a certain level and shows broader health. He anticipates a 5-10 percent correction, making the sector's attractive valuations draw fresh buying interest.

Meanwhile some analysts say that not all PSU stocks may regain post-correction. Themes such as railway, power, defense, and oil and gas, with high visibility and government support, will likely attract buying. Stocks without significant announcements may consolidate.

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.

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