Why it's risky to board speeding railway stocks

Railway-related stocks across segments – ranging from those building tracks to those manufacturing wagons -- may have shot up sharply after the Narendra Modi-led BJP got a clear mandate in the elections.

Shares such as Titagarh Wagons (which has now acquired Kalindee Rail Nirmal), Texmaco, Modern Industries, and BHEL have gained at least 25 per cent since May 16.

However, analysts are wary of the sustainability of the rally as the momentum of these stocks, which cater mainly to the rolling stock space, depends on fund infusion by the new Government.

Analysts said it must be noted that the extent to which capital expenditure of the Railways will go up depends on the BJP-led Government’s budgetary support.

According to Morgan Stanley, the financial performance of Indian Railways has been on steadily deteriorating in the 11th Five-Year Plan and also during the ongoing 12th Plan. “The lack of surplus generated has constrained investments required to meet the needs of the economy,” said Morgan Stanley in a recent research report.

Moreover, even if the budgetary support to the Railways were to go up, the expenditure in the first few years will be skewed towards building the fixed infrastructure such as rail tracks and signalling systems, pointed out an official. This would fuel demand for construction firms, sleepers, cement, steel rails, cables and signalling systems, among others.

Already, the dedicated rail freight corridor, which is basically like a third parallel rail line along the existing tracks, has created opportunities for firms in the construction space.

Continuation of Government focus on this project, for which loans from World Bank and JICA have been tied up, will create a business pie for firms in the infrastructure space.

Companies such as L&T, Tata Power, GMR, BSCPL, Oriental Structural Engineers, Essar Projects, Patel Engineering, Afcons and IL&FS India are already trying to tap this business.

Companies manufacturing steel rails include SAIL, Jindal Steel and Power. Those in signalling systems include Alstom and Siemens.

Even if BJP’s plans to create a bullet train network — which would be a very expensive affair — were to fructify, first there would be demands for track infrastructure.

However, analysts feel, the demand for rolling stock such as locomotives, wagons and coaches, can come from the existing network and significant capacity addition on the newer network. Demand for rolling stock on the existing network will depend partially economic recovery and good growth in traffic.

In fact, after the economic slowdown, Indian Railways’ traffic growth had slowed, which had pushed railways to slow down its wagon procurement programme. Also, demand for more rolling stock driven by newer infrastructure, such as new lines, will kick in only after completion of the track infrastructure.

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