PSU Stocks: Retail Rebels Rule as FIIs, MoFs Back Down in June Quarter

While big money players like FIIs and mutual funds are putting the brakes on, retail investors are fully into PSU stocks. The shareholding pattern for the June quarter shows that mutual funds sold stakes in 28 PSU stocks, FIIs sold 30, but retailers sold only 18 ‘sarkari’ stocks.

Take Bharat Electronics for example. Mutual fund shares fell 198 basis points (bps) in Q1 to 16.08%, while mutual fund shares fell 13 bps to 17.43% and retail shares rose sharply by 220 bps to 9.18%.

A similar trend was observed with popular retail brands such as HAL and RITES.

During the quarter, FIIs sold stakes in BEML, BPCL, Power Grid, HAL, IOC, RITES, HPCL, ONGC and banks – Bank of Baroda, Bank of India, Punjab and Sind Bank. Foreigners were bullish on at least 27 PSUs like NHPC, NALCO, Canara Bank, GAIL, RVNL, HUDCO and PFC.

Mutual funds lost patience with Hindustan Copper, Canara Bank, Bharat Dynamics, NHPC, PNB, PFC etc. and ended up buying more shares of BEML, IRCON, Engineers India, IRCTC, HUDCO, Power Grid and a few others. On the other hand, retail holdings rose in at least 41 stocks like Hindustan Copper, Bharat Dynamics, BEL, Canara Bank, HAL, BEML, NMDC Steel, SAIL, PFC, RECE, PNB and others. What should investors do with PSU stocks? Driven by strong performance, government reforms and a significant increase in capital expenditure by the government, PSUs have been a strong theme in the last two years, with a broad reassessment of stocks across sectors like railways, power utilities, energy finance companies, defence, shipbuilding and PSBs.

“The significant upside in these stocks is supported by strong earnings growth. Despite the recent rally, many of the companies are still trading at reasonable valuations, which is indicative of the strong EPS growth they have witnessed. Also, many of these companies, especially in shipbuilding, railways and defence, have strong order books that provide solid growth visibility in the coming years,” Krishna Appala, Senior Research Analyst at Capitalmind Research, told ET Markets in an interview.

Other analysts, however, believe some areas currently appear overvalued, notably the defense and rail sectors.

“PSU stocks have generally risen strongly and in some cases have outpaced fundamentals by a wide margin. While there are no near-term risks to growth, valuation-wise they have risen rapidly, especially in non-financial pockets,” says Narendra Solanki, Head Fundamental Research – Investment Services, Anand Rathi Shares and Stock Brokers.

He suggests that retail investors exercise caution and conduct a detailed risk-reward analysis before investing in these stocks, as historically markets tend to revert to the mean periodically whenever they experience excessive valuations.

Public sector companies operating in the defence and infrastructure sectors are attracting interest, but their valuations may not fully reflect earnings prospects, warns Palka Arora Chopra, director, Master Capital Services.

He added that investors should remain cautious and focus on public sector companies with solid fundamentals and sustainable growth rather than getting carried away by the current dynamics.

Public sector banks, while benefiting from improving asset quality, have seen valuations rise above historical norms.

“We believe that in terms of banking, currently there are small and mid-sized private banks (especially legacy private banks) that are available at attractive valuations compared to PSU banks and with ROAs already in the 1.3-1.5% range, which makes more sense. PSU banks have benefited from falling slippages and higher recoveries, but we believe the positive de-compensation is almost complete,” says Kashyap Javeri of Emkay.

However, PSUs as a whole remain reasonably valued. For example, the Nifty CPSE index is trading at 14 times PE (TTM), compared to the current Nifty 50 PE of 23 times.

“While the recent rally has made some stocks look overvalued, PSUs remain reasonably valued on a relative basis. They remain well-positioned to benefit from the overall economic growth and rising government spending in their sectors,” says Appala of Capitalmind.

(Data: Ritesh Presswala)

(Disclaimer: The recommendations, suggestions, views and opinions of experts are their own. They do not reflect the views of Economic Times)