PSU stock carnage continues on surprise election verdict; time to exit defence, railway stocks?

According to Emkay Global's perspective, PSU and capital goods sectors appear to be the most vulnerable, prompting the brokerage to advise against investment in these sectors for the time being.

PSU stocks continued to bleed on June 5 as investors booked profits. Shares of Cochin Shipyard, Bharat Dynamics, and other PSUs extended losses, tanking up to 10 percent in early deals today. This came after they were severely hammered in the previous session due to the actual vote count painting a different picture than the exit polls, which had projected a landslide victory for the BJP-led NDA.

With a lower-than-expected mandate for the NDA, the PSU sector appears the most vulnerable to the changed scenario. However, analysts expect the state-owned companies to sustain their rally in the longer run if the current government secures a third term even with the BJP not winning with a full majority. The bullish outlook is on account of likely policy continuity.

It is worth noting that PSU stocks were on an upward trajectory before the vote tally, fueled by initiatives such as Make in India, a rise in capital expenditure, and the government's emphasis on revitalizing the banking sector.

The stocks witnessed robust performance in recent times. However, concerns regarding political continuity have impacted investor sentiment, leading to a sharp decline in these stocks over two session.

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Although NDA is on track for a majority in the ongoing general election vote count on Tuesday. It is likely that Modi will return as the PM for a third term. However, he will have to contend with changed circumstances.

First, the BJP will be dependent on regional allies like Telugu Desam and Janata Dal (Secular) and make policy adjustments accordingly, said Emkay Global in its note.

According to Emkay's perspective, PSU and capital goods sectors appear to be the most vulnerable, prompting the brokerage to advise against investment in these sectors for the time being. Meanwhile, international brokerage UBS also suggested investors to switch from PSUs to FMCG.

Eminent investor Basant Maheshwari in his YouTube live also warned the PSU stocks holders saying that the market momentum from PSU, defence and renewable energy could shift amid formation of new government. The veteran anticipates all the PSU stocks, which were outperforming so far, to go down.

“Stocks, whether it from defence sector, renewable energy or any other PSU, which were outperforming earlier, are likely to witness a downward trend. I advise the investors to remain cautious and analyse accordingly," he said.

Also Read | Sushil Kedia's election aftermath playbook: Exit financials & PSUs, enter FMCG, IT sectors

At 10:21 am, REC, Engineers India, BEL, Rail Vikas Nigam (RVNL), BHEL, Ircon International, BPCL, Power Finance Corporation (PFC), RITES, HPCL, Bank of India, NMDC were trading 5-10 percent lower.

Sushil Kedia, the founder of Kedianomics believes that the era for public sector undertakings (PSUs) might be over, suggesting that defense and railway thematic stocks have also likely topped out.

Neeraj Chadawar, Head of Fundamental and Quantitative Research at Axis Securities has also emphasised the importance of being selective in investing in PSUs with clear earnings visibility and consistent order books.

"It's crucial to have assurance in execution efficiencies, particularly in defence orders, which span multiple years. While there are substantial orders in the defence sector, uncertainties about execution efficiencies remain for the next three to four years," he said.

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