PSU Stocks Hit Correction as New-Age Stocks Surge with Growth Momentum: Ajay Bagga, Elyments Platforms

“PSU Stocks See a Dip; Growth Stocks Like Zomato and Paytm Surge: Ajay Bagga, Elyments Platforms

Defense and railway stocks, mostly in the public sector, had become overvalued, and much of their future potential was already priced in. So, a correction was expected. Despite strong results with growth in revenue and profits, the high valuations needed a pause, leading to a breather for a few months before the next phase of growth, driven by execution, begins,” said Ajay Bagga, Chairman of Elyments Platforms.

ET Now: With concerns about the US recession easing and economic indicators showing improvement, the focus is shifting. The US is showing signs of disinflation, and there’s talk of the Federal Reserve cutting rates in September. How do you think FIIs will approach emerging markets in this scenario?

Ajay Bagga: This week has been the best for US markets since November, and Asian and Japanese markets have also performed well. We started the week with three major concerns: the US economy, the unwinding of the yen carry trade, and potential geopolitical risks from Iran. However, these risks didn’t materialize as expected, bringing relief to the markets.

For the US economy, we’ve seen a deflationary trend in both wholesale and consumer prices, strong retail sales growth, and better-than-expected unemployment data. This has created a “Goldilocks” scenario—an economy that’s holding up while prices are going down, which is great for the markets. On the yen carry trade, reassuring signals from the Bank of Japan helped, and with no more rate hikes expected, hedge funds have resumed short positions on the yen, which has weakened, boosting the Japanese market.

As for FIIs, a rate cut in the US is likely, and when that happens, the dollar usually softens, leading to increased flows into emerging markets. This has already started, with IT stocks in India being bought in anticipation of these moves. The week ended on a positive note, and we expect this momentum to continue.

ET Now: PSU stocks like HAL, BDL, and IRFC have seen a significant decline, while new-age stocks like Zomato, Paytm, and PB Fintech have surged, almost doubling from their 2024 lows. Is this a sign of growth returning, with more upside potential for these stocks?

Ajay Bagga: As mentioned earlier, defense and railway stocks, primarily in the public sector, had become overvalued, and a lot of future execution was already factored in. A correction was due, and despite good results, their valuations needed to pause and consolidate before the next growth phase. On the other hand, new-age economy stocks are benefiting from growth and momentum returning as factors in the market. These stocks are being bought on the expectation of future profitability. While some are already profitable, most are being valued based on their future growth potential.

This sector rotation is happening, but whether it’s sustainable remains to be seen. Personally, I prefer companies with positive cash flow, but there is strong demand for these growth stocks. For now, I’ll watch from the sidelines and stick with cash flow-generating companies. Defense and railway stocks will bounce back, but it will take time for their valuations to be justified.

PSU banks also saw a strong run, but now we’re seeing margin compression. With rising deposit costs, the margins and net interest margins (NIMs) are tightening, which will impact future results. That’s why we’ve seen a sell-off in these stocks. Both FIIs and domestic mutual funds have reduced their positions in banks, with public sector banks being hit harder due to their challenges in raising deposits as quickly as private sector banks, and the rising cost of deposits.”