Having surged substantially over the past year, stocks of companies in the railways space still have ample steam left to keep growing over the next few years 
Special 
Having surged substantially over the past year, stocks of companies in the railways space still have ample steam left to keep growing over the next few years Railways-focussed firms, once considered outdated remnants of a past era, have staged a resurgence in the past year by delivering returns on the bourses that would make even the most jaded investor whistle with joy. Market watchers say the government’s focus on improving and growing rail infrastructure in India in the past few years has fuelled this performance.
Sample this: The Ministry of Railways received Rs 2.4 lakh crore in budgetary allocation in 2023-24, which is 24.10 per cent of the government’s budgeted capital expenditure for the year. It used to be less than 18 per cent till 2018-19. The government’s overall capex has also increased by more than 3x to around Rs 10 lakh crore in FY24, from Rs 3.1 lakh crore in FY19. As a result, railways-focussed companies have had a stellar performance on the bourses in the past one year due to the huge inflow of orders.
On the Fast Track
For instance, with a growth of nearly 410 per cent, the average market capitalisation (m-cap) of Jupiter Wagons has soared to Rs 5,686 crore in the period, from Rs 1,116 crore earlier, resulting in its entry into the BT500 2023 list at No. 495. Ircon International has also managed to enter the list at No. 437 on the back of an order book worth Rs 32,486 crore in Q1FY24, up from Rs 13,293 in FY15. Ircon and Jupiter were not on the BT500 list in 2022.
“The current order book for Jupiter Wagons as of FY23 stands at Rs 58,200 crore, of which the order book for wagons is Rs 50,000 crore. Compared to the annual revenues of Rs 2,068.25 crore in FY23, this provides significant visibility for the next three years,” Vivek Lohia, MD of Jupiter Wagons, said in the company’s FY23 annual report.
Separately, commenting on the robust performance of railway companies, Sunny Agrawal, Head of Fundamental Research Desk at SBI Securities, says, “The government earmarked a capital outlay of Rs 2.4 lakh crore for the railways in Union Budget 2023-24. This has led to enhanced modernisation of Indian railways infrastructure, which has aided the railway companies to deliver robust returns.”
Railway firms have performed well as orders from the Indian Railways have gathered pace in the form of Vande Bharat trains, wagons and locomotives, among others. “Over time, the government has signalled its intent to award more tenders in future for both wagons and Vande Bharat [trains],” says Suraj Prakash Nanda, Senior Investment Analyst at ICICI Prudential AMC.
Chugging Along
However, in contrast to other railway companies, the rank of Indian Railway Catering and Tourism Corporation (IRCTC) has slipped by 14 places to No. 98 in 2023. Market watchers believe that its expensive valuation and the government’s decision to sell a part of its stake in the company have contributed to the stock’s subdued performance over the past year. This has introduced uncertainty into the market, affecting investor sentiment, they add. “Due to the significant re-rating in the stock price, IRCTC valuations were expensive. Also, the OFS (offer for sale) from the government played a dampener,” says Siddhartha Bhaiya, Founder and Chief Investment Officer of Aequitas Investment Consulting.
The central government had offloaded 5 per cent stake in the company through an OFS—at a floor price that was 7.4 per cent below its market price—in December last year. But Santosh Meena, Head of Research at Swastika Investmart, says that IRCTC shares continue to command higher valuations. This mismatch can be attributed to the unique nature of the company, which is not a traditional infrastructure player like others, but rather a tech-driven firm with a customer focus, and underpinned by an infrastructure play. “IRCTC enjoys a near monopoly in the online railway ticket booking business, setting it apart from the rest of the railways sector,” says Meena, adding that the company’s performance is only expected to improve when factors like increased demand for online railway tickets and announcements of new trains are considered.
The Journey Ahead
The exemplary performance of railways-focussed firms is just the beginning, with significant potential for further growth over the next five to seven years, analysts say. “Talks of mergers in the sector, aimed at achieving cost savings and improved efficiency, are also doing the rounds,” says Meena.
Of late, the announcement of a multinational rail and port deal connecting Europe and South Asia through the Middle East, discussed at the recent G20 Summit in New Delhi, has further fuelled the positive sentiment in the market. This involves building a new shipping and rail route connecting the three regions, with support from the US, India, Saudi Arabia, the UAE, EU, and other G20 partners. “Global developments, such as the India-Middle East-Europe Corridor announced at the G20 summit, and plans for a Bhutan-India railway network, hold promise for the industry’s growth,” Meena explains.
Nanda of ICICI Prudential AMC believes the country’s railways sector is on a secular growth trajectory, driven by a cyclical upturn in spends on rolling stock as well as a greater thrust from the government on expanding the railway network in the country, which includes the construction of dedicated freight corridors, high speed rail, and regional rapid transit systems. For instance, the National Rail Plan (NRP) lays down the road map for capacity expansion of the railways network by 2030 to cater to the growth in passenger numbers and freight volume up to 2050. According to the NRP, freight demand is expected to soar to 6,366 million tonnes in 2026 and 15,583 million tonnes by 2051 from 4,709 million tonnes in 2019. On the other hand, 1.06 million wagons will be required by 2051, against the 280,000 in use in 2018. Estimates also peg total passenger demand to jump from 9,457 million tickets in 2021 to 12,214 million in 2031 and 19,469 million by 2051.
Further, Agrawal of SBI Securities says the next five to seven years are expected to be buoyant for the railways sector on the back of factors like electrification of railway tracks, upgrade of stations of the Indian Railways, passenger trains, and the use of green energy by the Indian Railways, among other aspects.
Distance Covered
While the future looks bright for the companies operating in the sector, the past one year has also been robust. Sample this: IRCTC posted an 88.43 per cent year-on-year (YoY) rise in revenues at Rs 3,541.47 crore in FY23. The top line of other railway firms such as Jupiter Wagons, Ircon International, RVNL and IRFC also jumped by 107.71 per cent, 40.49 per cent, 4.64 per cent, and 3.46 per cent YoY in FY23, respectively.
Meena expects the sector to achieve a CAGR of 15 per cent in revenues from FY23 to FY26. “This expectation is rooted in a robust order book, a promising order pipeline, and the government’s unwavering commitment to bolstering railway infrastructure,” he says. As a result, there is potential for revenue growth to exceed initial assumptions of 10 per cent growth in FY24, he adds.
In short, the track ahead appears promising for Indian railway firms.
@iamrahuloberoi
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