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Santa rally for Railway stocks | Tactical bets ahead of upcoming Union Budget spur buying

An upmove in these stocks is largely due to tactical buying ahead of the upcoming Union Budget. Additionally, decent growth visibility because of a likely increase in railway capital expenditure has also propped up sentiment for the sector.

December 29, 2022 / 06:59 PM IST
The IT index has been one of the big under-performers with a decline of over 24 percent in the same period. (File image)

The IT index has been one of the big under-performers with a decline of over 24 percent in the same period. (File image)

 
 
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There seems to be an early Santa rally for railway stocks with investors rushing to buy shares of Rail Vikas Nigam Ltd (RVNL) and Indian Railway Finance Corporation Ltd (IRFC).

An uptick in these stocks is largely due to tactical buying ahead of the upcoming Union budget. Additionally, decent growth visibility because of a likely increase in railway capital expenditure has also propped up sentiment for the sector, according to market participants.

share price

Divestment & likely leg-up in capex

There was a news report that the government might divest up to 10 percent stake in RailTel Corporation of India, RVNL and four other listed railway firms, which also boosted investor sentiment for the sector, especially listed railway companies.

“Expectations around meaningful divestment in public sector rail units is a critical element in driving investor interest in the segment,” said Nirav Karkera, head of research at online brokerage Fisdom, while adding that prospects of a significant expansion in fleet and policy orientation towards achieving a more optimal road-rail freight mix has also enthused investors.

Another reason for excitement in the sector is due to hopes of some announcement related to the sector in the upcoming budget, said Awanish Chandra, head of equities, SMIFS, a financial services provider.

Around 300-400 Vande Bharat trains are expected to be announced in Budget 2023-24 as part of the Indian Railways’ plans to modernise its rolling stock, as per a report. This is in addition to the 400 such trains announced this year. The expectation is that about 100 train sets will be manufactured in 2023-24, the report stated.

An analyst from a foreign brokerage firm had pointed out that Indian Railways will also soon introduce Vande Bharat 2 trains that will be equipped with more advanced and improved features.

Investment in railway projects from the central budget is said to have risen 91 percent year-on-year to Rs 88,548 crore in the first half of the current financial year.

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The railways had one of the highest share of government capital expenditure in the last quarter and the government capital expenditure cycle is playing out in a big way, which has brightened the prospects of railways-related stocks from both near and long term perspectives, said Priyam Shah, an investment analyst from a Mumbai-based wealth management firm. He pointed out that railways’ capital expenditure last quarter was up 80 percent over the previous year.

Currently, the railways’ capital expenditure is around Rs 2 lakh crore, which is five times what it was in 2014. This figure will only inch up with the government’s increased focus on infrastructure, he added.

Tactical bets

Though these stocks have run up quite significantly, there is more steam left, Shah added.

“Railway stocks are generally a tactical play. This means investors are buying these stocks as a short-term investment bet based on the anticipation of some announcement from the government,” Chandra explained.

Karkera also believes that most railway stocks are expected to benefit from anticipated policy announcements around either higher capital expenditure or progress on divestment plans.

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A likely increase in railway-related capital expenditure could enhance the order book and revenue visibility of these companies, said a fund manager.

The pace of execution of railway projects such as new lines, gauge conversion and multi-tracking has increased by around three times year-on-year in the first half of FY23, Nomura highlighted in a December 1 report.

Valuation & technical perspective

“Railways as a sector is right at the centre of the government’s focus on developing the logistics network and achieving disinvestment targets. Most railway stocks, especially ones engaged in financing, infrastructure and manufacturing of wagons, are trading at relatively low valuations with strong potential of a fundamental rerating. For most such stocks, technical indicators are indicating a strong positive momentum with a bullish bias for the near term as well,” said Karkera.

Chandra is also of the opinion that several railway-related stocks generally have a low valuation which offers scope for an upside in the share price.

Also, interestingly, quite a few of these stocks are close to their 52-week highs.

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"Railway stocks have been in the news of late. However, not all stocks have a similar technical setup,” said Milan Vaishnav, founder and technical analyst, Gemstone Equity Research & ChartWizard FZE.

Stocks like RVNL, IRFC, RailTel Corporation of India, and IRCON International have run up hard ahead of their curve; they are seen consolidating and may take a breather. For investors, it is best advised to book profits either partial or fully, and take money off the table, he added.

Vaishnav is of the opinion that stocks like Titagarh Wagons and Texmaco Rail & Engineering remain in a stable uptrend and one can stay invested in these stocks while trailing their stop-losses appropriately. On the contrary, IRCTCCONCOR and BEML do not have any technical triggers on the charts so fresh entries in these stocks may not be a good idea. Investors can wait for a better time to enter these stocks, he believes.

Shah prefers companies like IRFC which are in a sweet spot because of their business model.

Dipti Sharma
first published: Dec 2, 2022 12:26 pm

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