PSU Stocks Rally Losing Grip Due to Weak Profitability, Higher Expenses; Time To Rejig Portfolio?

After chartbuster performance in recent months, PSU stocks are now tumbling across the board due to concerns about overvaluation, slowing earnings growth, and mandatory dividend payouts.

In the last year, PSU stocks have witnessed a sharp rally riding on bullish sentiments and monopoly business.

The BSE PSU index gained over 90 per cent in the last one year, while select top-performing PSU stocks have more than doubled, according to ACE data.

However, the BSE PSU index dipped 837 points to 21,977 in August points against 22,814 logged in the previous month.

Some of the stocks that plunged last month include Cochin Shipyard (-30 per cent), Garden Reach Shipbuilders and Engineers (-26 per cent), Mazagon Dock (-21 per cent), BEML (-19 per cent), and Engineers India (-18 per cent).

In an exclusive chat with News18.com, Narendra Solanki, Head Fundamental Research—Investment Services, Anand Rathi Shares, and Stock Brokers, he explained that after delighting retail by doubling money every few months, the multi-billion dollar rally in PSU stocks is finally taking a break.

Q1) Has the dream run for PSU stocks come to an end? Should investors rejig their portfolios?

Answer—Over the past year, PSU stocks (Defence, Power, Capital Goods, Infra, and Railways stocks) have witnessed an exceptional rally, which was led by productive capital expenditure, targeted government initiatives, and improved operational efficiencies. These have resulted in decent topline growth and significant bottom-line accretion in the past few years.

As a result, the markets have re-rated the PSE segment with higher P/E multiples leading to a spectacular run-up in share prices.

However, in the latest quarter, some stocks in these themes saw some dip due to weak profitability on a sequential basis due to some macro headwinds and higher expenses, also the elections played spoilsport impacting execution.

We believe that despite short-term challenges the broader theme remains intact in the long term, but valuations are not at comfortable levels right now as were in the past, and a lot of stocks in this pack have some form of cyclicity. Hence, I believe PSEs as a basket is not attractive/ cheap right now but some stocks are more attractive than others and that’s a stock-specific call one should take while evaluating PSEs.

I believe the trajectory is positive for the PSEs going ahead and it could continue to attract investors due to the growth opportunity. One should evaluate stocks independently and consider them for their long-term investment.

Q2) If it’s time to rejig portfolios then which sectors should one look at? 

Answer- On the sectoral front, we are positive more on domestic-focused sectors/ companies like Auto, manufacturing, consumer, defense, sectors benefiting from PLI schemes.

Q3) What are your top 5 stock recommendations?

Answer- A few stocks that we believe can make a significant move, considering favorable market conditions are:

Arvind Fashions – CMP – 540, Target – 689,

Gabriel India Limited – CMP – 514, Target – 610,

Finolex Cables Limited – CMP – 1,446 Target – 1,872,

Hindalco Industries Limited – CMP – 699, Target – 800.

RateGain Travel Technologies Limited – CMP – 734, Target – 935