Money-Wise: When PSU stocks turn bearish, should investors hold or sell? Experts weigh in

This week in the Indian stock market, the usually high-performing PSU or public sector unit stocks saw a slight slump. Many market watchers wondered if it has stepped into the bear zone.

Defence PSU GRSE saw a fall of 37 per cent, in comparison to its 52-week peak, and BEML slumped by 31 per cent and Cochin Shipyard by 30 per cent.

Stock market favourites like IRCON, IRFC, RITES, HUDCO, Mazagon Dock Shipbuilders and Bharat Dynamics also fell.

But a day after the decline, PSU bank stocks advanced and saw an upward trend in the stock market.

Explaining this slump, Retail Research Religare Broking Ltd's Senior Vice President Dr Ravi Singh said, "While PSUs have shown strong performance, recent corrections were on the cards. The PSU index remains in an uptrend, trading near a strong support zone of 6400-6600."

But why did these PSU stocks, which were doubling the money of the investors after every few months, go through a correction in the stock market?

"Many PSU stocks ran up too much too fast, pushing their valuations to unjustifiable levels. The bull run in the market and the retail investor enthusiasm help in this targeted jacking up of prices. Once the operator-driven rally runs its course, these stocks revert to realistic levels. The June quarter shareholding pattern reveals that mutual funds sold stakes in 28 PSU stocks while FIIs were bearish on 30 such counters," said Tanvi Kanchan, Head ofUAE Business & Strategy, Anand Rathi Shares and Stock Brokers.

Experts explain what's best for investors when PSUs turn bearish

• PSU stocks saw a normal price-wise correction. As long as the index stays above 6,400, investors should hold their positions and avoid panic selling.
• In the near term, PSU stocks may see some consolidation; but the broader outlook is definitely positive. Investors should look up for steady performance and more gains as the market stabilises and allows the fundamentally strong PSUs to catch up.

• PSUs which do not have a moat and are inefficient, with weak balance sheets, low profitability, and low growth might go out of favour now. One should be very careful in discriminating between moat PSUs which are not overvalued, vs which are overvalued and also between moat vs non-moat PSUs before reaching a conclusion.
• Only PSUs with moats, having high capital efficiency, strong balance sheets, good profit, and good cash flows can sustain themselves in the future.
• The Israel-Hamas conflict is expected to end which may impact Brent crude oil. This can impact PSU oil & gas stocks, which in turn will have a bearing on the Nifty PSE index.
• Capex-linked PSU stocks are also likely to gain as the government is expected to retain its focus on infrastructure development, railways, energy, power and manufacturing.

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Lt Col Rochak Bakshi(Retd), founder and CEO of True North Financial Services

• Those who have already invested should stay put and wait for the earnings to catch up and valuations to this cool down. It is best to stay invested with a longer-term view.
• There are a few pockets like banks which though not very cheap can be looked at but the broader strategy of investors should be for valuations to cool down and earnings to catch up before investing.
• PSUs with strong moats like defence have high capital efficiency and will improve their profitability from here on. We can expect a time-wise correction in the short to medium term.
• Eventually, these PSU stocks will move up in tandem with their earnings performance and have the potential to give above-average returns in the long term.