RITES, RVNL: Rail-related stocks gather steam. Analysts remain cautious

Shares of rail-related companies, mainly large-cap players, have outperformed the market in the past one year on expectation of higher outlay for the current financial year 2019-20 (FY20).  The High-speed Railway projects – modernisation of railway stations, the Ahmedabad – Mumbai High-Speed Rail Corridor (MAHSR) and depots are some projects that are expected to gain momentum in FY20.

The Interim Budget presented in February 2019 did not disappoint rail-related companies. Railways saw an allocation of Rs 64,587 crore and capital expenditure outlay of Rs 1.58 trillion for FY20 in Interim Budget 2019 – an increase of over 8 per cent compared to last year.

Funds worth Rs 7,255 crore were allocated for construction of new lines, Rs 2,200 crore was allocated towards gauge conversion, Rs 6,114.82 crore for rolling stock, Rs 700 crore for track doubling and Rs 1,750 crore for signalling and telecom.

The Indian Railways is planning to tackle mainline capacity constraints through capacity augmentation (doubling and tripling) of around 5,000 km in next three years, out of which around 2000 km is likely to be awarded under the EPC (engineering, procurement and construction) route.

Among rail-related counters, Larsen & Toubro (L&T), Siemens, ABB India and RITES have rallied between 25 per cent and 38 per cent, as compared to 12.5 per cent rise in the benchmark S&P BSE Sensex in last one year. The newly listed state-owned company Rail Vikas Nigam Limited (RVNL) has surged 50 per cent since its listing on April 11, 2019.

However, Hind Rectifiers and Kernex Microsystems were gained less than 10 per cent, while Cimmco and Titagarh Wagons were down 58 per cent and 33 per cent, respectively during this period.

“Money can be allocated towards city ‘Metro Rail’ projects and the government can spell out how much it wants to contribute to the State’s kitty for such projects over time. L&T, Siemens and ABB do get regular orders from Railways, but their valuation is a bit high. IRCON and RITES are the two stocks I am bullish on from this segment,” says A K Prabhakar, head of research at IDBI Capital.

L&T, which is also engaged in construction and maintenance of railways and rail-bridges besides other projects, has gained 25 per cent during the year. It is expected that all tenders for the 508 km MAHSR will be awarded in FY20 and the company expects to get a significant chunk of the same. The company’s railways business will focus on track, electrification and signalling and telecommunication.

“With the execution of the first two legs of the Dedicated Freight Corridor well underway, the focus has shifted to the Mumbai-Ahmedabad high speed rail project, rapid electrification of railway lines and track upgradation / augmentation. All these are likely to provide good business prospects in FY20,” L&T had said in its FY19 annual report.

Gaurang Shah, head investment strategist at Geojit Financial Services, however, remains cautious. “The rally in most counters fizzles out post the budget announcements. Rail-related stocks are, at best, good trading bets ahead of the Budget presentation. Such stocks do not create wealth in the long-term," he says.