In recent weeks, railway stocks have been on a tear, showing significant gains ahead of the anticipated Union Budget. Investors are abuzz with the possibilities that this sector holds, driven by the government’s focus on infrastructure and capital expenditure.
Here’s a deep dive into the reasons behind the rally and what we can expect moving forward.
Capital expenditure and budget expectations
Railway stocks have been propelled by the expectation of increased capital expenditure (capex) in the upcoming budget. Prabhudas Lilladher highlighted that the railways could see a substantial capex increase, especially with a greater emphasis on modernisation and the introduction of more Vande Bharat trains.
Data indicates a robust 31% year-on-year growth in capex for April-November FY24, with railways achieving 71% of their budgeted estimate (BE). PhillipCapital noted that the railways have been a frontrunner in capex among major ministries. This trend is expected to continue, though at a more moderate pace, according to Elara Capital.
Projections for FY25 suggest a 20% rise in capex, following a 30.5% growth in FY24, which is slightly lower than the budgeted 37.4%. Elara Capital predicts that 60% of the overall capex will be allocated to roads, railways, and defence, ensuring that infrastructure quality is maintained even if some budget allocations are trimmed.
ICRA, in its budget expectations note, also underscored the significance of adequate allocations towards infrastructure sectors such as roads and railways, amidst a healthy domestic growth outlook.
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Recent performance of railway stocks
Railway stocks have shown impressive performance recently, rallying up to 12% and hitting fresh 52-week highs. IRFC, RVNL, Ircon International, and Titagarh Rail Systems are among the top gainers. IRFC has gained 46% in the last five trading sessions and delivered a staggering 328% return over the past 12 months, making it the largest railway stock on Indian exchanges with a market cap of over ₹ 1.85 lakh crore.
RVNL, another significant player, has seen its share price swell by nearly 200% in the last year. Other stocks like Ircon International (234%), Jupiter Wagons (283%), Titagarh Rail Systems (135%), and Texmaco Rail (220%) have also significantly outperformed the Nifty, which has given over 23% returns during this period.
Despite the high valuations, these stocks are trading in strongly overbought zones. For instance, RVNL and Ircon are both trading above their 50-day and 200-day simple moving averages, with RSI and MFI indicators suggesting a strongly overbought condition.
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Triggers for the recent surge
Several factors have contributed to the recent surge in railway stocks:
Government announcements
The rally can be attributed to recent announcements by the Minister for Railways, Ashwini Vaishnav. Plans for 2,500 new general passenger coaches and 10,000 additional coaches have sparked investor interest. The introduction of 50 new Amrit Bharat Trains, a high-speed and luxury train service, has also fueled the upward movement in railway stocks.
Budget expectations
The market anticipates significant railway infrastructure-related announcements in the upcoming budget. The consistent focus on infrastructure by the Indian government since 2014 has set the stage for a growth-oriented Union Budget 2024.
Recent orders and contracts
Recent orders and contracts have also played a crucial role. For instance, RailTel Corporation secured a ₹ 20.22 crore order from South Central Railway for telecommunication works, boosting its shares by 9.2%. Similarly, RVNL received a ₹ 160 crore order from East Coast Railway, contributing to a nearly 5% increase in its share price.
Future outlook
Looking ahead, the outlook for railway stocks remains positive. The government’s focus on modernisation, increased capex, and strategic planning will likely continue to drive growth in this sector. The anticipated budget allocations towards infrastructure will further strengthen this trend.
However, investors should remain cautious about the high valuations and the overbought conditions of some stocks. While the growth potential is significant, it is essential to monitor the market dynamics closely and make informed investment decisions.
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Conclusion
The rally in railway stocks ahead of the Union Budget highlights the sector’s potential and the government’s commitment to infrastructure development. With significant gains in recent months, railway stocks have outperformed the broader market, driven by strong capex growth and strategic planning.
As we move closer to the budget announcement, investors will be keenly watching for further developments and announcements that could impact the sector. The focus on modernisation, rolling stock upgrades, and infrastructural improvements will continue to be key drivers for railway stocks in the coming months.
