Preliminary trends in the counting on Tuesday indicate that Prime Minister Narendra Modi is probably going to win the Lok Sabha election and secure a third consecutive term.
Today's focus is on stocks that stand to gain from the victory of the BJP-led NDA and continued policy stability.
The majority of these equities, known as "Modi stocks," are public sector undertakings (PSUs), while some private businesses are also included.
The majority of these equities are associated with domestic cyclical industries, including capital goods, manufacturing, infrastructure, defense, and electricity. Under PM Modi's third term, they are anticipated to directly profit from both present and future policy initiatives.
"The Nifty surged yesterday, driven by strong exit poll results predicting a decisive victory for the BJP-led NDA and positive economic indicators like an 8.2% GDP growth in FY24, a 'above normal' monsoon forecast, a 10% rise in GST collections, and falling oil prices,"Â said Prashanth Tapse, Senior VP (Research), Mehta Equities Ltd
"Markets are closely monitoring if PM Narendra Modi will get a historic third term and whether the NDA will win more than 400 seats today, as the results of the Lok Sabha election are still coming. If everything work out well, the Nifty might rise to 24000, but the 22500 level is still a vital support level. HDFC AMC, SUZLON, and DLF are important equities to keep an eye on. Tapse suggested long-term accumulation of SUZLON.
Companies like HAL, Bharat Electronics, HPCL, GAIL, REC, Power Grid Corporation, SBI, Container Corporation of India, PNB, NTPC, and SAIL are among the PSUs that are listed as stocks.
A list of 54 Modi stocks published by CLSA includes, among others, Bharti Airtel, Indian Hotels, ACC, Adani Enterprises, Adani Ports, Reliance Industries, L&T, and Vodafone Idea.
Due to a number of variables, including favorable valuations, strengthening order books, clean balance sheets, solid fundamentals, and the government's emphasis on maximizing the power of government-owned enterprises, PSU equities have been experiencing a ceaseless climb over the last year.
PSU market capitalization as a share of the overall market cap is now 17%, up from 14% during the previous election year. Given that the historical 20-year average is 21%, PSU stocks may yet rise from their current positions.
The BSE PSU index finished Monday's session about 8% higher, with power and bank companies leading the gainers. It's not the first time either. The PSU index increased by 82% in 10 months during the 2014 election, and by 18% in 7 months during the 2019 election.
PSU stocks peaked in both situations, usually around June, a few weeks following the election results. This year, analysts predict a similar trend, with a possible peak before the budget announcement in June or July.
Numerous narrative and PSU equities are factoring in optimistic volume and profitability forecasts and are trading at high multiples.
In segments of the market (autos, capital goods, PSUs), a significant BJP win would keep high-to-bubble multiples alive for longer, but we would be shocked if many of the high expectations materialized, according to Sanjeev Prasad of Kotak Institutional Equities, who spoke to The Economic Times.
Analysts advise investors with a limited time perspective to book profits on Modi stocks.
"But since there will be adjustments, if your horizon is long enough, you actually don't need to do that. Even in the global context, from June to September, we normally do not see huge corrections historically "When the global market corrects, there could be deeper corrections of 10–20%," independent market expert Sandip Sabharwal told ET.
PSU banks' valuation has increased to 12.2 times after the current rally, which is an 8% premium to their upper Standard Deviation range. This value is comparable to that of FY17, which came before three years of poor performance.
Furthermore, the PSU Index now places long-term growth expectations at 37% of the price, surpassing historical highs of 35% in FY17. Elara Capital stated, "The bullish trend for PSUs may moderate, but there are still opportunities that can spark a new rally and yield substantial returns."
Brokerages are wary of mid- and small-cap firms, which directly benefit from government-led capital investment, in addition to well-known PSU equities.
Elara Capital stated that the wide-ranging surge in this sector may normalize after the elections because of the significant difference between price and fundamentals, and that the plays would be targeted.
