Passenger fares may be hiked marginally; exit rail stocks: analysts

Given the upcoming assembly elections, analysts do not expect the govt to adopt populist measures

Rail related stocks have done well since December 26, 2016 when the market hit its recent low with counters such as Hind Rectifiers, Timken India, BEML, Kernex Microsystems, Titagarh Wagons, Texmaco Rail and Kalindee Rail gaining three per cent to 28 per cent till January 27. By comparison, the benchmark indices - the S&P BSE Sensex and the Nifty50 have gained eight per cent and nine percent each respectively, during this period.

Since the union budget would subsume the railways budget and internalise its revenues and expenditure, analysts believe these changes do not alter the overall aim and outlook of the budget, but will only change its format and presentation to some extent. The practice of presenting a separate railway budget was introduced by the British government 92 years ago to focus more on India's most important infrastructure network.

"We expect the finance minister to increase the capital outlay for the railways sector to Rs 145,000 crore, a growth of more than 20 per cent year-on-year (y-o-y). We also expect some increased allocation for the government aided projects like the dedicated freight corridor (DFC), metro projects, clean Ganga projects etc," says a pre-Budget note from IndiaNivesh Securities.

Given the upcoming assembly elections, analysts do not expect the government to announce new trains as it would violate the model code of conduct. However, they do not rule out a moderate hike in passenger fares, besides a higher capital outlay to improve the infrastructure and modernisation of facilities.

"The changes will be cosmetic. There can be a slight hike in passenger fares. The government cannot announce new railway lines or trains given the upcoming state elections. I think such proposals will come in once the elections are over. Cosmetic things that generate revenue for the railways such as increasing the platform ticket rates, fares for local trains - especially the second class fares etc can see a minor uptick," suggests A K Prabhakar, head of research at IDBI Capital.

Investing strategy

Though there could be some steam left in these stocks till the Budget proposals are unveiled, experts say, investors are likely to book profit once the event is over. Moreover, the proposals announced will take time to bear fruit and be visible in the financial performance of the companies with a lag effect.

While the order wins are necessary for these companies, bringing down the working capital cycle and timely execution still remains an impediment. All these things need to improve, and this will not happen in a hurry. Hence, till there is an improvement in the above-mentioned factors, railway stocks are best avoided. However, they do remain a trading bet ahead of the Rail budget, analysts say.

"Most stocks have already rallied and it is a good time to book profits. Typically, these stocks do tend to move up ahead of the rail budget presentation and the rally fizzles out post the event. It is advisable to book profit and stay away from these stocks for now, as most of these announcements will not immediately turn into orders or add to the bottom-line immediately," Prabhakar says.

G. Chokkalingam, founder & managing director of Equinomics Research & Advisory, too, agrees. "These stocks are a trader's delight as they run up ahead of the event and the rally fizzles out once the budget is presented. Business environment for the railway related stocks has not improved much over the years. It is advisable to exit these stocks," he says.