Analysts cautious on railway stocks despite resumption in train services

Analysts believe the resumption of passenger train services is like a sentimental boost from the government and can give a short-term bounce to the stocks, an extension of lockdown may dent sentiment

The government on Sunday gave a green signal to resume passenger trains on select routes from May 12, after nearly two months of halt, even as India continues to register spike in Covid-19 cases. The online bookings for the initial 15 trains will be done by Indian Railway Catering and Tourism Corporation (IRCTC), starting May 11.

These special trains will be run from New Delhi, and connect Dibrugarh, Agartala, Howrah, Patna, Bilaspur, Bhubaneswar, Secunderabad, Bengaluru, Chennai, Ranchi, Thiruvananthapuram, Madgaon, Mumbai Central, Ahmedabad, and Jammu Tawi. Fares will be equivalent to that of Rajdhani trains.

Reacting to the development, IRCTC and Rail Vikas Nigam surged 5 per cent upper to it their upper circuit at Rs 1,302.85 and Rs 17.15, respectively on the BSE. Besides, stock of Ircon International jumped 7.3 per cent, Texmaco Rail and Engineering gained 4 per cent, Titagarh Wagons 2.4 per cent, and BEML 1.5 per cent in the intra-day deals.

The rally on Monday comes on the back of a mixed performance at the bourses for most of the rail-related stocks over the past one month. While IRCTC, BEML, and Titagarh Wagons advanced 39 per cent, 12 per cent, and 5.6 per cent, respectively during the period under review, Ircon International, Texmaco Rail and Engineering, and Rail Vikas Nigam have declined 2.5 per cent, 3 per cent, and 7.7 per cent, respectively. In comparison the benchmark S&P BSE Sensex has gained 5.8 per cent.

Investment strategy

Analysts believe the resumption of passenger train services is more like a sentimental boost from the government and can give a short-term bounce to the related stocks, an extension of the lockdown beyond May 17 will continue to dent fortunes of the sector.

 

“The decision to resume passenger trains in a phased manner is indicative of the fact that more openings are on the cards. There is a consensus now that extension of the lockdown will do more harm than good,” said V. K Vijayakumar, chief investment strategist at Geojit Financial Services.

The outlook for the railway sector, he says, is set to improve but, from the markets perspective, there are better opportunities elsewhere.

“There will be a preference for private transport in the present context as social distancing is difficult to be maintained in railways. Two-wheelers, therefore, will witness much better demand conditions going forward,” he suggests.

Shutting passenger services lead to stoppage of around 12,500 trains on a daily basis – including 9,000 passenger trains and 3,500 mail/express trains, reports suggest. The Railways, however, has been running freight services.

“We have been under lockdown for over 50 days, but this can’t continue indefinitely. Therefore, the move is indicative of resumption of economic activity in the country. However, the stocks are still not attractive yet. Despite the passenger trains resuming, they have already incurred huge losses and another 2 quarters look weak. Therefore, I would suggest investors to wait for a couple of months, let the initial euphoria die down, and buy when normalcy returns,” says AK Prabhakar, head of research at IDBI Capital.

Owing to the lockdown, passenger earnings for FY20 contracted marginally by 1.07 per cent to Rs 50,472.20 crore. Earnings for March, however, dropped 62.36 per cent, while the national transporter saw a loss of Rs 463.30 crore in the first 20 days of April, down 115.49 per cent from Rs 2,990.8 crore during the same period in 2019.

Harendra Kumar, managing director for institutional equities at Elara Capital also believes the decision to resume services, even though partially, will not have a material impact on the sector and the decision must be seen only as a sentiment boost.

“The announcement only shows that the government is looking at restarting the industry and wants to bring life back on track. That said, this will only reduce risk premium in the markets and doesn’t make railway-related stocks attractive. It might be positive for IRCTC in the short-term but nothing beyond that,” he suggests.