The robust fundamentals, robust order books, and rising performance indicators are the major drivers of the bullish attitude that persists notwithstanding certain worries over values.

Driven by a robust surge in state-owned firms, the percentage of public sector companies in India's overall stock market valuation climbed to a seven-year high of almost 16 percent in May. This spike contrasts with the apex of 29 percent in February 2009 and is a huge increase from the low of 7.8 percent in October 2020, which has doubled since then.

There is hope for further development with solid political and policy continuity as more PSU enterprises, including big players like LIC, get listed, according to Neeraj Chadawar, Head of Fundamental and Quantitative Research at Axis Securities. He stated, "Healthy fundamentals and reduced government intervention have boosted confidence in PSU stocks, leading to positive sentiment and rerating."

Together, listed PSU companies have contributed about Rs 18 lakh crore this year, bringing their total market valuation to Rs 67.4 lakh crore. A contributing factor to this growth has also been the recent arrival of newly listed PSUs. The benchmark Sensex and Nifty have increased by just 3%, whereas the BSE PSU Index has significantly increased by 35%.

Analysts think that solid fundamentals have been driving the rise. But, as the pendulum swings toward excitement, investors are ignoring worries about value.

There is logic to that. Ambareesh Baliga, a market specialist, noted that until recently, some stocks and industries were disregarded for an extended period of time. "PSU equities, such as PSU banks and military firms, did not receive much attention four years ago. However, many of them are now multibaggers, which means that their value has increased dramatically. As a result, PSU stocks now have a higher weight in the market. PSU equities have led the increase, notwithstanding the positive performance of the Indian markets as a whole."

Analysts credit the surge in PSU equities, in addition to less government intervention, to the firms' growing order books during the previous four to five years, as the majority are in the core industry, which is seeing a cyclical turn. Following an extended period of poor loans, banks - which make up the majority of the PSU pack—have been able to clean up their accounts. They are now recording strong returns on equity (ROEs); SBI has surpassed numerous private sector banks by generating double-digit ROEs. PSU stock prices have risen as a result of this shift, and the difference between PSU multiples and those of private companies has shrunk.

Chadawar stressed the need of picking PSUs with steady order books and clear profits visibility while making investments. "It's critical to have confidence in the effectiveness of execution, especially in defense orders that span several years," he said. Even if the military industry has large orders, there will be uncertainty over execution efficiency for the next three to four years."

He said that sustained momentum in those equities should be anticipated if execution efficiency matches market expectations. Chadawar further stated that there were no unpleasant shocks in the PSU stocks' profits for the March quarter, which were in line with expectations.