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Ahead of Budget 2018 mixed performance for rail-related stocks

Analysts suggest one needs to be selective and pick only those stocks where there is earnings visibility and on-ground execution of projects

Deepak Korgaonkar & Puneet Wadhwa  |  Mumbai / New Delhi 

Indian Railway budget 2018
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It has been a mixed performance for railway-related stocks at the bourses thus far in calendar year 2018 (CY18) with Larsen & Toubro (L&T), India and rallying up to 25% ahead of the presentation on February 1.

On the other hand, Hind Rectifiers, Titagarh Wagons, BEML, Stone India, and Zicom Electronic have slipped 3% to 17%. By comparison, the S&P BSE Sensex and Nifty 50 index have gained 6% thus far in CY18. Also Read: Budget 2018: A 15-year, Rs 35.3-trillion plan to put Railways on track

The rally comes amid reports that the Indian Railways is working on Rs 35.3-trillion investment plan by 2032, pushing up the capital expenditure for the ministry by around 92% annually. The average annual investment, including capacity addition and modernisation, would touch around Rs 2.5 trillion, up from the Rs 1.31 trillion in 2017-18.

"Besides securing fresh orders, the now expect a lot of the orders secured by these companies till now to get executed. As a result, the financial performance of these companies can improve over time," explains A K Prabhakar, head of research at IDBI Capital. Also Read: Budget 2018: Budgetary support for Indian Railways to be cut by 27% in FY18

That apart, there are expectations that the budget could provide some insights into the initial public offer (IPO) plans of three arms of Indian railways - Indian Railway Finance Corporation, IRCON International Limited and Indian Railway Catering & Tourism Corporation Ltd (IRCTC).

STOCK STRATEGY

So, should you stay invested in these stocks, or will the rally derail post the budget presentation? Analysts suggest one needs to be selective and pick only those stocks where there is earnings visibility and on-ground execution of projects.

"One needs to figure out the companies where there is consistent growth and earnings visibility. Given the rally, investors can book partial profit in these stocks. That said, I like ABB, Siemens, and among the rail-related stocks," adds Prabhakar of IDBI Capital.

Thus far in financial year 2017-18 (FY18), nearly half of these rail-related stocks have outperformed the market by surging nearly 60%, as compared to 22% rise in the benchmark index. Also Read: Budget 2018 to be historical; Railways' capital investment to triple: Goyal

Hind Rectifiers, the largest gainer among the pack for instance, has surged 59% in FY18.

The company manufactures rectifiers, transformers, active harmonic filters, static stabilisers, converters, power electronics and semiconductor devices. These products are made primarily for the Railways and a diverse segment of industrial applications.

Titagarh Wagons, and L&T, too, have gained in the range of 35% to 40%, while India is up 27% thus far in FY18. NBCC - a housing construction company - has rallied 34% during the period. Given the expectation that the budget could seek to modernise railway stations, analysts expect some benefits to flow to NBCC as well.

"The government is taking steps to decongest the existing network, improve safety of passengers and return the railways to profitability. We expect the allocation to increase by 10% for FY19. Higher railway spending is a key positive for rail equipment suppliers and contractors. L&T, India, India, Crompton Greaves and KEC International are the key stocks to watch out for," says Gautam Duggad, head of research at Motilal Oswal Institutional Equities.

First Published: Tue, January 30 2018. 23:32 IST
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