Rail stocks zoom before Budget

Most have rallied between 10 and 50 per cent in a month compared to a less than 3 per cent rise in the Sensex

Railway-related stocks rallied up to 13 per cent on Monday, a day ahead of the presentation of the Railway Budget. In the past month, most of these stocks have rallied 10-50 per cent, against the rise of about three per cent in the benchmark BSE Sensex.

On Monday, Texmaco Rail & Engineering, Titagarh Wagons, BEML, Kalindee Rail Nirman (Engineers), Kernex Microsystems (India) and Stone India gained 4-13 per cent on BSE. By comparison, the Sensex rose 0.5 per cent to 26,100.

Analysts expect in the Railway Budget, the government will focus on modernisation and devise new strategies to attract private investment in the Railways.

“The biggest portion of the Railway Budget, which is the related to passenger fares and freight rates, has already come about before the Budget presentation. I do not expect fresh measures on that front now. However, we will look out for long-term plans and how the government targets the longer-term rail potential. Some of the key specifics include modernisation plans, professionalising the Railways and/or part-privatisation,” says Vaibhav Sanghavi, director (equities), Ambit Investment Advisors.

“Having said that, we do understand this cannot happen overnight. But the longer-term vision is key. The government also talked about the rail corridor and plans/vision regarding that will also be important. Before making an investment call in these stocks, I would wait for the government to spell out its plans for the Railways,” he adds.

In June, the government had raised railway freight rates 6.5 per cent and passenger fares 14.2 per cent. In 2013-14, the United Progressive Alliance government had linked railway fares to fuel costs (diesel and electricity). The rise, effected in June, was due in April, but the move was put on hold owing to the Lok Sabha elections.

Though the rise in fares would add to inflationary pressures, would improve the profitability of the Railways and, therefore, is a move in the right direction, Nomura economist Sonal Varma said in a note.

“After the recent rise in rail fares, expectations from the new government, in terms of taking tough decisions to revive the economy, have increased significantly. Introducing 100 per cent FDI (foreign direct investment) in Railways will positively impact the sector,” says Tirthankar Patnaik, director (institutional research), Religare Capital Markets.

Analysts at Kotak Securities (private client research) say the strong mandate in the elections and the recent announcement of a rise in railway passenger fares/freight rates have raised expectations several reform measures will be announced in the Union Budget.

“We expect the finance minister to budget for a 17 per cent increase in Plan expenditure. Allocations to important infrastructure sectors such as power, railways, roads, ports and rivers will likely be enhanced. The focus will be on stricter and time-bound implementation of these budgets,” they said.