PSU, Defence & Infrastructure 2022–2024: The Thematic FOMO That Tested Patience
Government capex drove a massive re-rating of PSU and defence stocks. NFO inflows surged near the peak. Then came the correction — even as the underlying story remained valid.
The government's infrastructure push led to 200–350% gains in PSU and defence stocks between 2021 and mid-2024, spawning dozens of NFOs and billions in fund inflows. A subsequent 30–40% correction tested whether investors had bought the story or the valuation.
The Macro Thesis: Government Capex Revival
India's central government capital expenditure rose dramatically from approximately ₹4.4 lakh crore in FY20 to ₹10 lakh crore in FY24 — a 2.3× increase in four years. This capex boom targeted roads, railways, defence manufacturing, power infrastructure, and urban metro projects. The beneficiaries were PSU companies (BHEL, NTPC, Power Grid, Railways PSUs, Defence PSUs like HAL, BEL, BEML) and large private infrastructure players.
The investment thesis was sound: India was clearly ramping up defence self-reliance, infrastructure development, and energy transition. PSU companies that had been neglected for a decade suddenly had full order books. The question — that most investors did not ask — was what price they were paying for these companies.
The Rally: Numbers That Created FOMO
| Index / Stock | Jan 2021 to Peak (2024) | Peak P/E (approx) |
|---|---|---|
| BSE PSU Index | +220% | 20–25× (vs historical 8–12×) |
| Nifty India Defence Index | +380% | 50–80× P/E |
| Nifty Infrastructure Index | +160% | 25–35× P/E |
| HAL (Hindustan Aeronautics) | +450% | 40–50× P/E |
| BHEL | +250% | 60–80× P/E |
| IRFC (Indian Railway Finance) | +320% | 25–30× P/E |
These were staggering returns from companies that had been valued at historical lows just a few years earlier. The re-rating from "unloved PSU" to "India growth story" compressed expected future returns significantly — but this was not visible to investors looking at the trailing 3-year performance numbers.
The NFO Mania: Fund Inflows at Peak Valuations
Between 2022 and mid-2024, dozens of thematic NFOs targeting PSU, defence, and infrastructure themes were launched. Combined NFO collections for these themes ran into tens of thousands of crores. The NFO mechanism worked precisely as it always does: funds launched after the run-up to capture the narrative momentum, collecting the most money precisely as valuations were most stretched.
The FOMO buying pattern
A defence fund NFO launched in early 2024 after the defence index had risen 350%: • Story: "India will be the world's third-largest defence manufacturer by 2030" • Valuation reality: defence stocks at 60–80× P/E vs global peers at 15–25× • NFO collection: ₹8,000–12,000 crore in a few days • Investor thought: "I've already missed so much, I can't miss more" The story was true. The price paid was still too high.
The Correction: Story Intact, Price Adjusting
From mid-2024 onwards, PSU, defence, and infrastructure stocks saw a meaningful correction. PSU Bank Index fell 25–30% from its peak. Many defence stocks corrected 35–45% from highs. Infrastructure stocks corrected 20–35%. The government capex story did not change — budget allocations remained high. But the market had priced in 10 years of good news in the stocks' already-elevated P/E multiples, leaving little room for further upside without a long consolidation.
Key Lessons
- →A correct macro thesis and a good investment return are not the same thing — the price paid is the most important determinant of returns, not the quality of the underlying story
- →Thematic NFOs are almost always launched after the significant returns have been made — the investors who benefited most bought these stocks 2-3 years before the NFOs existed
- →Valuation matters even for "growth" stories — buying a defence company at 70× P/E requires 7–10 years of exceptional earnings growth just to justify the entry price at modest equity returns
- →Maximum NFO inflows into a theme often mark or are close to the peak of that theme's outperformance cycle
- →Existing diversified funds (flexi-cap, multi-cap) with a quality mandate also participated in the PSU/defence rally through position building — without the concentrated risk of a thematic fund
- →For thematic/sectoral funds: invest with a view, set a target (e.g., 15% weight in portfolio), book partial profits when the theme outperforms significantly, and accept that you will never buy the exact bottom or sell the exact top
This case study is for educational purposes only. Past market events do not guarantee similar patterns in the future. All data is approximate based on publicly available market information.