Shares of public sector undertakings (PSU) gained ground after the exit poll data, released post market trading hours on Monday, projected Bharatiya Janata Party-led National Democratic Alliance (NDA) getting a simple majority by crossing a seat tally of 272 in the recently concluded general elections.
If the NDA's tally surpasses UPA's 259 tally, the new government may well be one of the strongest in recent times with the party not needing to go in for any hard bargaining with post-poll allies. This assumes more significance for the PSU stocks that, over the past few years, have been waiting for a policy boost for a change in their fortune.
Among individual stocks, Bharat Heavy Electricals Limited (BHEL), Bharat Electronics, BEML, Oriental Bank of Commerce, Power Finance, Indian Oil (IOC), OIL India and Hindustan Copper are among few have rallied more than 5% each on the Bombay Stock Exchange (BSE).
The S&P BSE PSU index, a gauge for state-owned shares, has rallied nearly 4% as compared to 1.6% rise in benchmark S&P BSE Sensex in intra-day deals. Thus far in 2014, the index has moved up nearly 21% as compared to 13% rise in the benchmark index.
Though analysts suggest that they expect a stable government at the centre, especially after the exit poll outcome, they do remain cautious on the road ahead for the markets.
"We view exit polls with some caution based on the results in 2004 and 2009, and especially in this case where there appears to be a differential between them and the majority of pre-election opinion polls. Additionally, the bar to exceed expectations on the final counting day (16 May) has moved even higher," point out Sonal Varma, Aman Mohunta and Alastair Newton of Nomura in a report.
"However, notwithstanding a possible knee-jerk market reaction on 16 May, the exit polls confirm and strengthen our baseline expectation of a stable NDA-led government, which is a positive outcome, in our view," they add.
But what does this mean for the reform process, especially for the PSUs? And then, what should your strategy investment be?
Says Jyotivardhan Jaipuria, managing director and head of research, Bank of America-Merrill Lynch "Most exit polls have predicted a majority (or close to majority) for BJP-led NDA. However, exit polls have a chequered past as far as their reliability is concerned. We believe the market is currently pricing in a stable coalition."
"In a stable Government scenario, we highlight three themes: (a) high quality domestic cyclicals; (b) reform exposure; and (c) exposure to beaten down deep cyclicals as a tactical strategy, including infrastructure and PSU banks," he adds.
Dipen Shah, head of private client group research at Kotak Securities suggests that the reform process will continue once there is a stable government the centre.
"A stable government would mean that they would also be able to take politically tough decisions in the interest of the economy. A stable government will be able to provide impetus to investment in the infrastructure sector besides addressing policies related to the fiscal issues. Divestment in PSUs is an ongoing process and is likely to gather steam once the new government is in place. Among the PSUs, we like the infrastructure sector, banking and the capital goods sectors," he says.
Mayuresh Joshi, vice - president for institutional research at Angel Broking advises that one needs to be stock selective given the run-up in most of these stocks.
"Given the run-up, one needs to be stock selective. From the mid-cap PSU banking space, we like Syndicate Bank and Bank of Baroda; ONGC from the energy pack and Power Grid from the transmission space. We also like Engineers India. As regards BHEL, we feel that there is some amount of margin compression. However, the stock can move up given the overall sentiment," he says.