PSUs, Sensex firms see maximum erosion in investor wealth; BSE mcap plunges by nearly Rs 50 lakh crore

From a record high of Rs 477.93 lakh crore, it now stands at Rs 429.33 lakh crore, marking a decline of Rs 48.60 lakh crore.

The combined market capitalisation of all listed firms on the BSE has plunged by nearly Rs 50 lakh crore since its peak on September 27, amid a persistent correction in domestic equities. From a record high of Rs 477.93 lakh crore, it now stands at Rs 429.33 lakh crore, marking a decline of Rs 48.60 lakh crore.

PSUs have led the losses, shedding over Rs 15 lakh crore, accounting for 31 percent of the total erosion. BSE Sensex constituent firms lost Rs 13.28 lakh crore (27.3 percent), while BSE MidCap companies saw a decline of Rs 8.36 lakh crore (17.2 percent) in market capitalisation. BSE SmallCap firms saw a market capitalization erosion of Rs 6.87 lakh crore, a decline of 14.1 percent, while other firms collectively lost over Rs 5 lakh crore, marking a 10.5 percent drop.

Experts attribute the erosion to a combination of factors including persistent selling from foreign investors, weak September quarter earnings with higher domestic valuations, and expectations that the Reserve Bank of India would refrain from rate cuts due to elevated inflation. Additionally, global geopolitical tensions and the potential return of Donald Trump to power in the US, raising concerns about renewed global trade wars, further weighed on market sentiment.

Christy Mathai, fund manager at Quantum AMC is of the view that valuations in several sectors, including PSUs, are stretched. “We’ve been sitting on close to 16-17 percent cash. If further corrections occur, we would deploy,” he says.

Similarly, Shaun Cochran, Head of Research, CLSA believes that short-term valuations have been very high. A correction or consolidation was expected, as the market questions whether earnings targets can be met, he says.

An analysis of 227 companies within JM Financial's 275-stock coverage universe reveals that 45 percent missed estimates. Further, the consensus EPS and target price revisions following Q2FY25 results indicate that 66 percent of companies experienced EPS cuts for FY25, while 45 percent saw reductions in target prices.
Smaller and midcap stocks (SMIDs) were hit harder, with a higher percentage facing EPS cuts exceeding 3, 5, and 10 percent. Notably, EPS cuts greater than 10 percent were more prevalent among SMIDs compared to larger-cap companies

The September quarter earnings of PSUs have largely disappointed, with half of the 100 reporting firms underperforming. Fourteen PSUs posted losses, while 29 saw a year-on-year decline in net profit. Around 20 companies reported only marginal or single-digit sequential growth in net profit. On the operating profit front, 39 firms registered a sequential decline, and 25 reported flat or single-digit growth. Year-on-year, 42 companies experienced a drop in operating profit, with another 14 showing minimal growth.

The focus on PSUs has been selective, with attention directed toward specific segments such as public defence and industrial capital goods, says Mathai. “Valuations in some of these sectors, particularly tied to invoicing, have done pretty well. However, concerns are emerging about the outlook, particularly around cash flows and order books.” These concerns, Mathai said, are not new. “We’ve been seeing these issues for some time, even before the last quarter. There has already been some correction in PSU valuations from this perspective,” he added.

Going forward, as per CLSA’s Cochran, India has a compelling growth story for the next cycle as emerging markets, particularly India, could gain prominence as global investors look for growth stories though India’s structural limitations cap performance at fundamentals. With nominal GDP growth compounding around 10% over the next decade, market performance will likely be constrained and if global markets experience a significant drawdown, India could outperform fundamentals and attract renewed foreign interest, he said.

Meanwhile, since its peak, the BSE PSU Index has fallen 17.5 percent while Sensex, BSE MidCap and Smallcap lost over 10 percent each. Among the 103 listed PSU firms, five entities have dropped over 50 percent from their recent 52-week highs, while 21 recorded declines of 40-49 percent. Additionally, 40 firms saw their stock prices fall by 30-40 percent, and 24 experienced corrections of 20-30 percent. The remaining 13 firms faced declines between 5-20 percent.

“The market hasn’t gone ahead of fundamentals. For example, if earnings have grown by 50%, and the mcap growth is only 20% since COVID, this isn’t an inappropriate trend. It’s just the way markets move,” said Mathai.
In March 2024, Kotak Institutional Equities advised investors to exit PSU holdings, cautioning against being swayed by the ongoing rally. The firm noted that the surge in stocks was driven by bullish sentiment rather than fundamental improvements.

Despite positive returns across PSUs in FY24, Kotak highlighted issues like overly optimistic profitability assumptions, flawed valuations, and unrealistic narratives. While favorable government policies may boost short-term prospects, Kotak warned that PSUs' focus on reinvesting cash flows in existing businesses could hinder their ability to adapt to long-term disruptions.

Mathai advised investors to remain focused on long-term goals. “These market movements are part and parcel of investing. Investors shouldn’t get unnerved by short-term volatility. Continue with SIPs (Systematic Investment Plans) in funds where there is a margin of safety. If India’s GDP grows at 6.5-8%, nominal growth could be around 11-12%. Add some premium for equities, and you’re looking at potential returns of 14-15%,” he said.

But DSP Mutual Funds’ Anil Ghelani believes that to understand the markets, one must look at a simple "Co-F-E" framework of three different aspects - corporate earnings, flows and event risk. “Currently, corporate earnings are subdued. When it comes to flows, from an overall number FII outflow as a proportion of their total holdings is minimal at about 2%. But it could become a concern if the number increases. For me, a risk to be watching out for is event risk from geopolitical conflicts,” he says.

Ghelani adds that this is the biggest concern for the Indian markets right now and it could put pressure on earnings growth going ahead. “For example, increase or decrease in crude oil prices as a result of escalation or de-escalation of Russia-Ukraine and Israel-Hamas conflicts,” he says.

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