Will PSU stocks face more sell-off pressure after a 25% drop?

PSU stocks, which experienced a sharp bull run during Monday's trade, tumbled swiftly in today's session as the actual vote count painted a different picture than the exit polls, which had projected a clear victory for the BJP-led NDA in the 2024 Lok Sabha election.

As a result, BSE PSU index plummeted by almost 16% in today's trade, closing at 18,964 points. Top losers from this sector included REC, PFC, and Bharat Heavy Electricals, each witnessing losses of up to 25.19%.

Nearly 52 stocks within the index concluded today's session with losses ranging between 10% and 20%.

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PSU and capital goods stocks have been on an upward trajectory, fueled by initiatives such as Make in India, a rise in capital expenditure, and the government's emphasis on revitalizing the banking sector. 

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

According to recent data, Indian Prime Minister Narendra Modi's alliance is on track for a majority in the ongoing general election vote count on Tuesday. However, the current numbers indicate that the margin of victory might be smaller.

Also Read: Multibagger PSU stocks including PFC, REC, RVNL fall up to 25%

This suggests that Prime Minister Modi may have to run a coalition government for the first time. Market sentiments turned sour on this expectation, as policy-related decisions in a coalition government cannot be made by the BJP alone. 

They would need the agreement of coalition partners, raising concerns about potential delays and compromises in decision-making, a scenario that has not been prevalent over the past decade.

"It is likely that Narendra Modi will return as 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."

"Second, there will be greater demand to stimulate consumption in the economy from both the BJP and its allies. There is an outlier possibility that the opposition could form the government if some of the BJP’s existing allies cross over. We think that would be unlikely," said Emkay Global Financial Services.

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In terms of market outlook, the brokerage foresees a short-term market derating, as the perceived risk associated with India has increased. 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.

Conversely, the brokerage anticipates a resurgence in consumption, particularly in FMCG and value retail segments. Additionally, a positive outlook is maintained for the healthcare sector.

Also Read: PSU stocks tumble as early trends show mixed results; BSE PSU down 8%

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.