Speeding rail stocks: analysts see more traction

Railway stocks are generally in limelight only around the Railway Budget and post that nobody talks about them for a year. Contrary to this, in recent times, railway stocks have been witnessing more activity.

Many rally

While the S&P BSE Sensex has given a negative return of about 5 per cent in the last one year, share prices of companies, such as Texmaco Rail and Engineering, Titagarh Wagons, Hind Rectifiers, Stone India and Kalindee Rail Nirman (Engineers), which are directly related to the prospects and plans of Indian Railways, have gained 25-107 per cent.

Kernex Microsystems (India) is an exception and is down 34 per cent.

Market participants believe that the gains in their share prices have been based more on hope and expectation like any other infrastructure company while financial performance is still weak.

“The mood has changed. Since the last one year, investors have not been that apprehensive about railway stocks as there is a perception that the new government and the Railway Minister will bring in structural changes,” said Sharad Awasthi, head of research, Spa Group India.

In the trailing four quarters, cumulative revenues of the direct beneficiaries have declined by 22 per cent year-on-year, while net loss widened and ballooned six times.

Going ahead, there is a possibility of at least 15-20 per cent return in the run up to the next Railway Budget as investors are hopeful of progress and orders flowing to the companies soon.

“The Railway Minister had made important announcements in the last Budget. Thus, the upcoming Budget would be an important one from that perspective. Since the last Budget, things have also started moving and the railways have been on a big investment spree,” said UR Bhat, MD, Dalton Capital Advisors.

Indian Railways signed a memorandum of understanding with the LIC in March for financial assistance of ₹1.5 lakh crore over the next five years for implementing railway projects. Of this, ₹2,000 crore has already come in as financial assistance for investment in capacity augmentation projects. The investment by LIC is to be made through bonds issued by railway entities such as Indian Railway Finance Corporation.

Apart from this, it is also expected to enter into a $30-billion deal with the World Bank.

The Railway Ministry has planned to invest ₹1 lakh crore in FY16, which is a part of the ₹8.5-lakh crore capital expenditure planned for the next five years.

Market players expect orders to flow in by the last quarter of FY16 or the first quarter of FY17. However, improvement in financial performance is expected to take a while and is widely estimated to happen from the second half of FY17.

Prospects appear bright for both these companies as well as the investors.

But the only mantra for considering railway stocks would be: Keep a minimum horizon of three years. Texmaco and Titagarh are the top picks of market players as manufacturing wagons is their core business and hence are directly related to the growth of the economy.

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