PSU Stocks Recovering, But Valuations Still Unattractive: Expert View

Public sector undertaking (PSU) stocks, which experienced significant corrections from their July and August peaks, are gradually showing signs of recovery. However, some fund managers are still refraining from investing in these stocks due to valuation concerns.

Manish Sonthalia, Chief Investment Officer at Emkay Investment Managers, expressed caution in a recent interaction with CNBC-TV18. He pointed out that despite corrections ranging between 25% to 50%, stocks in sectors like railways, defense, infrastructure, and capital goods remain on the “prohibitive side” in terms of valuations.

PSU Stocks: The Correction Story

Shares of state-run companies have witnessed a steep decline after rallying to record highs earlier this year. Stocks in the railway sector, such as Indian Railway Finance Corporation (IRFC), IRCON International, and Rail Vikas Nigam Limited (RVNL), have dropped between 30% to 40% from their peaks. Similarly, shares of shipbuilding companies like Cochin Shipyard and Garden Reach Shipbuilders & Engineers have seen their values halve from record highs.

This correction followed a phase of euphoric buying, fueled by robust government initiatives and increased investor focus on infrastructure and defense modernization. However, the steep valuations during the rally were unsustainable, leading to profit booking and a sharp decline.

Valuations Remain a Concern

Despite the significant corrections, Manish Sonthalia remains skeptical about the attractiveness of PSU stocks. “The valuations of these stocks are still on the prohibitive side. We are not seeing value buys in sectors such as defense, railways, infrastructure, or capital goods,” he remarked.

The reluctance to invest comes amid ongoing concerns over long-term growth prospects and the cyclicality of earnings in these sectors. Sonthalia’s caution highlights that while the correction has brought prices down, they may still not be at levels where long-term investors find compelling value.

Railways and Defense: A Closer Look

The railway sector has been one of the key beneficiaries of government initiatives aimed at modernizing infrastructure. Companies like IRFC, IRCON, and RVNL were in the spotlight earlier this year as they hit record highs on the back of these developments. However, these stocks have since lost substantial ground, with corrections of 30% to 40%.

Similarly, the defense sector, which saw a surge in investor interest amid India’s push for indigenization, has faced headwinds. Companies such as Cochin Shipyard and Garden Reach Shipbuilders, key players in India’s naval modernization plans, have seen their stock prices halved.

Investors Remain Divided

The broader market sentiment toward PSU stocks remains mixed. While some see the correction as an opportunity to enter at more reasonable valuations, others, like Sonthalia, remain cautious.

Factors such as improving fundamentals, government reforms, and favorable macroeconomic conditions could provide tailwinds to these sectors. However, lingering concerns over governance, earnings sustainability, and sector-specific risks weigh on investor sentiment.

What Lies Ahead?

PSU stocks have historically been cyclical, heavily influenced by government policies and economic conditions. With sectors like railways, defense, and infrastructure positioned as key drivers of India’s economic growth, the long-term potential cannot be ignored.

However, for fund managers like Sonthalia, the focus remains on valuation discipline. Until these stocks align with fair value estimates, they may continue to avoid adding PSU stocks to their portfolios.

Conclusion

The recovery in PSU stocks has reignited debates on whether they are worth considering for long-term investment. While some investors view the corrections as an entry point, fund managers like Manish Sonthalia urge caution, emphasizing the importance of valuations.

For retail and institutional investors, the takeaway is clear: while PSU stocks hold promise, careful assessment of their valuations and growth prospects is crucial before making investment decisions.

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