Should you invest in Railway stocks now?

In the history of India, a rare sight was witnessed on August 11, 2023. On that day, the Prime Minister shared a mantra related to shares. Yes, PM Modi had stated in Parliament that investors could safely bet on government company shares, especially those that were being mocked. It was on that day that investors took Modi’s seemingly casual remark seriously, and a frenzy to buy shares of government companies ensued.

The result was evident in the next month, with the BSE PSU and BSE PSU Bank indices witnessing a tremendous surge of 10% to 75% in government company shares, accounting for 80% of the total 55 stocks.

The most noteworthy aspect was that this rally was broad-based, meaning shares of government companies in all sectors saw a surge. Shares related to the railway sector outperformed others, whether they were from government or private companies. What was the reason behind the exceptional performance of these railway-related shares? How are these shares valued? And from an investment perspective, which shares are currently more favourable? Let’s explore.

In the past six months, shares related to the railway sector have doubled, with three shares delivering returns of more than three times the investment in one year.

The significant investments and infrastructure development in the railway sector by the government led to a re-rating of railway shares. In the first half of FY23, there was a 91% increase in capital expenditure on railway capacity expansion, indicating clear growth intentions in the government’s sector. In the 2023-24 budget, the government allocated Rs. 2.4 lakh crore to the railways, the highest ever, nearly nine times more than in 2013-14.

Additionally, commitment towards modernization and efficiency are visible in the revamp of major stations like New Delhi, Mumbai, Ahmedabad, and the production of 400 Vande Bharat trains for the new era. Urbanization and the increasing income of people have significantly contributed to a remarkable increase in railway passenger numbers. According to a report, India is expected to have a 40% global share in rail activity by 2050.

Moreover, in the financial year 2022-23, the railway sector received a direct foreign investment (FDI) of a total of $1.2 billion. There is an expectation of an investment of ₹50 lakh crore in railway infrastructure by 2030, leading to substantial buying in railway shares.

According to market expert Ravi Singh, following the announcement in the budget last year, the government declared an additional investment of six to seven thousand crores in the railway sector in the second half of 2023. The government has also made significant changes in its policies, benefiting state-owned companies.

Now, how are the valuations of railway shares looking after the recent rapid surge?

Currently, government and private companies working in the railway sector such as Ircon Intl, IRFC, RITES, and RVNL are trading below a PE (Price to Earnings) ratio of 30. However, all other shares are currently above a PE ratio of 45.

Ravi Singh believes that the valuations of many shares are appearing expensive, but the momentum in shares is based on the anticipation of future orders. These companies have a strong order book, and there is an expectation that it will continue to remain robust in the future.

Ravi Singh believes that there is an expectation of a 20% or more growth in railway shares this year, with returns of up to 8% achievable by the budget. Potential buying opportunities may exist in stocks like IRFC, RVNL, Railtel, Titagarh Rail, and RITES. It is anticipated that these shares will continue to show positive momentum, although the pace might be slightly slower than before.

In total, due to significant government spending and allocations in the railway sector, it is expected that the companies’ order books will remain strong for at least the next two years. This is likely to have an impact on the results of companies related to the railway sector. Consequently, the momentum in railway shares is expected to continue into 2024. However, after the rapid rally, the pace of these shares might slow down a bit. In such a scenario, you can buy selective shares in a gradual manner as and when market corrects.