Why Railway Stocks are Rising

It's very rare to see majority of stocks from an entire sector being rewarded with an upper circuit on every order win.

But that's how the sentiment has remained for railway stocks overall.

Investors who were highlighting competition from substitutes like the Indian aviation sector services, have been proven wrong for the time being.

Look at the table below to see how railway stocks have performed over different time frames.

Top Railway Stocks Performance

		Change (%)
Company	Current Price	2024 so far	1 month	6 months	1 year
Bharat Heavy Electricals Ltd.	219.75	11%	23%	132%	174%
Concord Control Systems Ltd.	950.00	9%	43%	231%	315%
Indian Railway Catering And Tourism Corporation Ltd.	1026.40	15%	19%	65%	60%
Indian Railway Finance Corporation Ltd.	176.39	76%	80%	405%	438%
K&R Rail Engineering Ltd.	701.85	-2%	0%	46%	557%
Kernex Microsystems (India) Ltd.	695.85	20%	17%	117%	139%
Larsen & Toubro Ltd.	3633.70	3%	5%	41%	63%
Oriental Rail Infrastructure Ltd.	275.25	13%	23%	320%	299%
Rail Vikas Nigam Ltd.	320.75	76%	81%	135%	321%
Railtel Corporation Of India Ltd.	443.70	26%	50%	186%	249%
Ramkrishna Forgings Ltd.	763.35	7%	5%	51%	171%
Siemens Ltd.	4078.25	1%	3%	13%	33%
Texmaco Rail & Engineering Ltd.	217.35	25%	26%	155%	261%
Titagarh Railsystems Ltd.	1175.30	13%	12%	91%	407%

Data Source: Equitymaster

Multiple factors have collectively contributed to the lofty valuations that we're seeing Indian railway stocks trade at.

Let's look at each of these factors in detail and the top individual stocks where the momentum still seems in favour of investors.

#1 Budget Optimism

The primary reason behind the current rally is the upcoming Union Budget 2024. Investors are expecting the government to go on a spending spree in the railway sector.

This optimism got a boost after railway minister Ashwini Vaishnaw said at the World Economic Forum 2024 in Davos that the progress in expansion and modernisation is huge.

• "Last year we added 5,200 kms of new tracks. That's like adding the entire Swiss network in one year. We are now aiming at a pace of 15 kms of tracks a day".

Following strong election results for the current government in charge ahead of interim budget on 1 February 2024, experts suggest this year's budget theme would be a higher allocation towards the railway sector.

#2 Heavy Order Books

As mentioned earlier, every order win for a particular railway company is rewarded with an upper circuit or rating expansion.

This, without investors considering other important points including the stress on the company's ability to execute, to earn decent margins and returns, and on its ability to manage finances and cash flows.

This example of what's happening in railway companies at present has kind of set a trend. Investors don't want to miss out on this big megatrend and are currently betting on the company's future.

What Next?

It has always been important to upgrade India's railway system, but never before has the government expressed such a keen interest.

The news that the Indian government would implement a production-linked incentive (PLI) scheme for manufacturers of train components gave the railway industry a significant boost.

Last year, Indian-made 1.54 million (m) forged wheels were ordered by the railways. This is a step in the nation's drive to draw in international manufacturers and lessen its reliance on imports.

Given increased incomes and population expansion, there will undoubtedly be an increase in the demand for railway services.

The sector is the fourth-largest railway network in the world.

India's railway industry is on the cusp of a revolution, which will open up more opportunities for businesses in India, especially tourism.

In India, unlike the United States of America, the government continues to control the railway sector. The government has just recently been considering the admission of private players to operate stations, manage routes, and run trains.

All data suggests that railway stocks are well-positioned to reap significant benefits from the flourishing expansion of the country's railway network.

However, the recent run-up in the stock prices has made investors wonder whether all the positives are factored in the bright outlook, possibly limiting the upside in the stock price in the near term.

So for easy reference, let's look at the individual stocks in detail and their future growth prospects.

# IRFC

Last week, Indian Railway Finance Corporation (IRFC) shares surpassed Tata group company Tata Steel's marketcap in intraday trade.

IRFC's marketcap also surpassed other biggies like Jio Financial Services and Varun Beverages.

Later this month on 29 January 2024, around 20% of IRFC's outstanding equity will become eligible for trading once its lock-in period ends.

Once the IPO lock-in period ends, shares of the company could see some volatility although lock-in ending does not necessarily mean that the shares will be sold in the market. It just means that so and so shares will become eligible to be traded.

Analysts are expecting the company to continue reporting good numbers in the future quarters as well as given the government's focus on the sector which will need massive capital infusion.

IRFC's robust balance sheet size with nil gross NPA, low overheads, and the Indian Railways' huge capex needs bode well for the company's growth prospects over the long term.

# RVNL

The recent optimism for RVNL comes after it emerged as the lowest bidder for a Rs 2.5 billion (bn) power transmission project in Jabalpur.

The contract was awarded by M.P. Madhya Kshetra Vidyut Vitaran and is to be completed in the next two years.

Earlier this month, RVNL via its joint venture secured the approval for a significant upgrade of Varkala Sivagiri railway station.

Prior to that in December 2023, another joint venture between RVNL and URC emerged as the lowest bidder for part design and construction of an elevated viaduct, five elevated metro rail stations and ramp for the Indore Metro Rail Project.

RVNL recently laid out a strong growth plan for the next five years. Power financing company REC entered into an agreement with RVNL to finance up to Rs 350 bn worth of infrastructure projects, to be executed by RVNL over the next five years.

RVNL currently caters to about 30% of the infrastructure requirements of Indian Railways and has also pioneered the implementation of large infrastructure projects under the PPP model.

The company was awarded the Navratna status in May last year, paving the way for higher autonomy concerning projects, capital expenditure, international ventures, and attracting superior talent.

Going forward, the company's margins could improve as the huge order book gets executed.

# Texmaco Rail

Texmaco Rail shares have been in demand ever since the company received a mega Rs 13.7 bn order from the Indian railways.

It is currently manufacturing 500 wagons a month and is aiming to hit 1,000 in the next few years.

The company is also looking for export opportunities in African and European countries to improve its export revenue.

It is also working on backward integration to reduce costs and improve margins.

With the Indian Railways planning to procure 1.5 million (m) freight cars by 2025, and the government's aim to increase the share of railways in freight to 45% through the National Rail Plan 2030, Texmaco Rail stands to benefit.

The company is further exploring opportunities in related domains such as the 'Modern Train Communication System' and 'Kavach'.

# Titagarh Rail

Ever since announcing its plans for doubling its freight loading volumes and post launching its QIP worth Rs 7 bn, Titagarh Rail shares have shot up.

Titagarh Rail Systems separates from its competitors as it saw an advantage in high-speed rails and jumped at it and bagged Vande Bharat's orders. Moreover, it also has a first-mover advantage in metro rail projects.

The company is investing heavily in capex to expand its manufacturing capabilities to accommodate these orders.

It is aiming to produce 1,000 wagons a month by the end of the financial year 2024.

The company has secured various new high-value orders, which can significantly improve its revenue.

It is also working on backward integration for passenger rail systems business to manufacture propulsion systems in-house. This will help the company cut down on costs significantly.

Moreover, the company recently acquired Precision Shipyard and has been building ships for the Navy and the National Institute of Ocean Technology.

# IRCTC

IRCTC generates majority of its revenue from its primary business of e-ticketing. Apart from this, the company is engaged in catering, travel and tourism, and packaged drinking water.

Now, to expand its business further, the company has announced its plans to become a premier brand in hospitality and catering in India.

Investors are optimistic about the company's future and hence the company is on the upward trajectory.

Also, with the addition of new trains and number of trips, the overall capacity of the railway network is expected to increase.

This can result in more travellers using IRCTC's services for e-ticketing, catering, and tourism-related offerings.

Moreover, the long-term nature of the train procurement plan (15 years) provides IRCTC with a stable and extended period to plan its services and offerings in alignment with the increasing needs of passengers.

# Concord Control Systems

Concord Control manufactures and supplies coach-related and electrification products for Indian Railways and other railway contractors.

Listed in 2022, Concord Control is an approved vendor by the Research Design and Standards Organisation ("RDSO"), enabling it to manufacture and supply critical products for the Indian Railways.

While the Indian Railways commands a large chunk of the company's revenue share, Concord Control Systems has been diversifying its client base.

It supplies railway components to marquee players in the industry, such as KEC International, Larsen & Toubro, Kalpataru Power Transmission, Rail Vikas Nigam, Fedders Lloyd Corporation, and Tata Projects.

Recently, the company acquired 26% stake in Progata India to develop the prototype of control and relay panels.

It also forged an alliance with IISc startup for railways - L2MRail - in the form of a joint venture to fortify the safety of Indian Railways.

The company's strong financials and diverse clientele with a focus on supplying crucial components, present an optimistic outlook.

In Conclusion

Apart from the above companies, take a look at the railway ancillary companies that are driving modernization and efficiency.

Just like auto and auto ancillary stocks, the performance of railway and railway ancillary stocks goes hand in hand.

Check our detailed editorial here - Top 7 Railway Ancillary Stocks to Play the Railway Theme in 2024.

There are some more companies like Apar Industries, Elgi Equipment, HBL Power, and TD Power that are doing something on the railway side.

You should also keep these stocks on your watchlist as the country focuses on upgrading its railway infrastructure to achieve higher efficiency and reliability.

In conclusion, 2024 could be a year where investors could face disappointments if earnings growth of these companies does not keep up with expectations.

Or it could be a surprise year where these stocks continue their good run... no one knows really.

One thing is sure, it would not be wise to expect similar returns from them in 2024 compared to an excellent year like 2023.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...