Nifty PSU indices on the brink: Can fall up to 15%

Amid the recent decline in midcap and smallcap counters over the past three trading sessions, stocks of public-sector undertakings (PSUS) have also faced a downturn, with the National Stock Exchange Nifty CPSE, Nifty PSE, and the Nifty PSU Bank slipping by 2.3 per cent, 1.6 per cent, and 1.3 per cent, respectively.

By comparison, according to data, the Nifty Smallcap, Nifty Midcap, and the Nifty 50 indices shed 3.1 per cent, 2.2 per cent, and 0.1 per cent, respectively, during this period. Despite the fall, the key PSU indices are holding onto the crucial moving averages such as the 20-day moving average (DMA), 50-DMA, and 100-DMA on the daily scale.

In simple terms, the short-term moving averages are positioned higher than the medium-term averages, suggesting that the broader trend remains positive.

However, the charts indicate that these indices are testing support around their respective short-term moving averages (20-day DMA). Technically, as long as the indices sustain above them, the shortterm trend is considered positive. However, a worrying signal emerges. For the first time since November 2023, the weekly Relative Strength Index (RSI) has shown a negative divergence. This suggests that the index may consolidate or face downward pressure in the near term.

Similarly, the weekly RSI has also displayed a negative divergence for the Nifty CPSE index. Furthermore, the weekly RSI seems set to turn negative for the Nifty PSU Bank index. At the fundamental level, Chokkalingam G, founder and head of research at Equinomics Research, mentions that many PSU stocks are still trading at steep valuations and might experience further correction from here on out.

“The run-up in 2023 in several PSU stocks had been sharp, taking valuations to the stratosphere. They’re now undergoing a reality check. Select stocks from the oil and gas, bank, railway, and defence sectors can still undergo a correction of 10-15 per cent from current levels. This is healthy and will wipe out all the excesses,” he said.

In the past year, while the Nifty50 gained 29 per cent, the rally in select PSU stocks has been remarkable, with shares of Indian Railway Finance Corporation rising nearly 413 per cent during this period, according to ACE Equity data.

Regarding PSU banks, analysts at Kotak Institutional Equities suggest that Tier-ii PSU banks have seen a sharp valuation rerating over the past two years, resulting in a swift convergence in the valuations of all PSU banks closer to State Bank of India (SBI). Making an investment case for Tier-ii PSU banks, they believe, has become challenging.