Amid high expectations, rail stocks end mixed ahead of Railway Budget

Since the interim rail budget in 2014, six out of nine companies engaged in rail infrastructure business have outperformed the market by gaining up to 77%

Rail-related stocks closed mixed, ahead of the Railway Budget on Thursday. Titagarh Wagons, Kernex Microsystems, Hind Rectifiers, Texmaco Rail and Engineering, Container Corporation and Cimmco ended up to six per cent lower on the Bombay Stock Exchange (BSE) as compared to the S&P BSE Sensex and the CNX Nifty that ended the day flat

Meanwhile, over the past two trading sessions, except Siemens, the remaining eight stocks have slipped one – 16 per cent with Titagarh Wagons seeing the biggest fall of 16 per cent during this period.

Since the interim rail Budget in 2014, six of nine companies engaged in the rail infrastructure business have outperformed the market, rallying up to 77 per cent on expectation that the NDA's (National Democratic Alliance's) first full Railway Budget in February 2015 would allow greater foreign investment in Indian railways and encourage more private participation in railway projects.

Expectations

The Railway Budget is being keenly watched for announcements pertaining to innovative sources of funding and make some headway in taking the PPP schemes forward, overall improvement in infrastructure, operations and passenger amenities.

“We expect a renewed thrust on railways in the railway budget. The government my propose to place orders for more rolling stock for the railways, invest in increasing railways capacity by augmenting the current infrastructure (new railways lines, double - gauging of single lines, broad - gauging) and invest in safety infrastructure (signalling systems, over and under bridges to replace manned crossings) in FY16,” point out Sanjeev Prasad, Suvodeep Rakshit and Indranil Pan of Kotak Institutional Equities in a recent report.

Though analysts expect railways and related infrastructure to attract large amounts of capital over the next few years, they are unsure if the government has sufficient projects to invest in currently. Its thrust areas – high-speed rail network, dedicated freight corridors (other than the two ongoing projects) and related areas of industrial corridors, and smart cities – are likely to take time to evolve, they say.

“Markets do not expect the rail Budget to hike passenger fares. However, I expect the fleshing out of details regarding the stated thrust on modernisation of Indian railways by the government. There are areas that have been flagged off where massive capital expenditure is expected to happen over the medium-term,” said Ajay Bodke, head of investment strategy and advisory, Prabhudas Lilladher.

“What the markets expect are more details on how would the government go about funding the capital expenditure or Capex plans. What are the innovative means that the government will use and how will they tap the sovereign wealth funds, pension funds, life insurance companies overseas at competitive rates. There is no dearth of resources overseas that are willing to invest for the long term,” he adds.

Outlook

At this juncture, Bodke of Prabhudas Lilladher prefers to play the railway theme via the capital goods space and prefers companies that have proven track record here. The ones that have demonstrated capabilities of executing projects timely and in a cost effective manner, besides having the technological edge. Prateek Kumar and Mihir Jhaveri of Religare Institutional Research, however, have a buy rating on Titagarh wagons with a March 2016 target price of Rs 690, as they believe the company is poised for a sharp turnaround in volume growth and profitability.

“Growth would be led by potentially large order announcements for rail wagons in the upcoming rail budget after a three-year hiatus, likely easing of competitive pricing pressure, renewed private sector demand as the capex cycle turns, and foray into new segments such as metro coaches, defence equipment and tractors,” they point out.