Railway stocks have been performing well after the capex push in Budget 2023.
Indian Railways got record capital outlay of Rs 2.4 lakh crore for 2023-24. According to Finance Minister Nirmala Sitharaman, that's about nine times the outlay made in 2013-2014. The increased focus on capex aided stocks of companies providing services and goods to the railways.
Rail Vikas Nigam Ltd. has topped, surging nearly 82% gains so far this year, followed by Indian Railway Construction International Ltd. at 41.11%, and Rites Ltd. at 11.12%.
RVNL and Ircon have outperformed their benchmark Nifty PSE. The gauge of public sector enterprises is up 12.54% year to date. By comparison, Nifty and Sensex rose 2.05% and 2.42%, respectively, during the period.
Why The Rise
The budget has given railways a healthy dose of investment infusion. Of the total capital expenditure of Rs 2.93 lakh crore for the railways in FY24, Rs 2.40 lakh crore is budget support. That's one in every four rupees of the budget’s capital expenditure.
Overall order inflow in these railway companies has helped them to gain momentum.
Vande Bharat trains project is giving a boost to all the railway stocks.
RVNL has gotten a flurry of orders. The Navratna status company has set its eye on infrastructure projects in other countries. It signed an memorandum of understanding with Kyrgyzstan for an order worth Rs 18,000 crore.
It has an order of 120 trains at Rs 120 crore per train set for the Vande Bharat project, a joint venture between Russian transportation company CJSC Transmashholding and RVNL. The company is facing an issue due to sanctions on Russia, which is expected to resolve in few weeks.
However, the company expects FY24 to be a consolidated year.
Rites, a leading player in transport consultancy and engineering sector in India, has 45% of its order book from consultancy segment, a high-margin business. The order book of Rs 5,870 crore will give revenue visibility to the company for the next two years, according to Axis Securities Ltd.
Ircon International, which has a Rs 35,000 crore order book, aims to grow its revenue at 5-7% in FY24, the company said.
These companies get business through nomination and bidding. While RVNL used to work on nomination a year and a half ago, it is concentrating on acquiring business through bidding. The company had 64% of its order book through nomination and rest through bidding as on FY23.
The bidding to nomination ratio for Ircon International is 55:45.
Rites earns a higher operating profit margin because of its presence in business consultancy, which contributed 41% to its revenue in FY22.
RVNL is optimistic of an improvement in Ebitda margin as it enters management consultancy services, the company said on a concall.
What Next?
Companies are diversifying their order book and growing in non-Indian railway projects. RVNL is diversifying and bidding on projects in various sectors, including metro and road. While Rites is seeing growth in its non-Indian railway clients in the quality assurance sector, contributing a steady stream of revenues.
Ircon is bidding for railway and highway projects and is also open to building construction, project management consultancy, airports, tunnels and complex bridges. The company's solar power project plant, which is under construction, is expected to start contributing from FY24-25.
The Indian Railway Catering and Tourism Corp., which manages the catering and hospitality services at stations, expects growth on increased e-catering due to the addition of Vande Bharat and other trains.
According to the company's management, revenue from Bharat Gaurav scheme is expected to reach Rs 250 crore in FY24 from Rs 60 crore in FY23, because of addition of new trains. Vande Bharat trains and expansion of Bharat Gaurav scheme are expected to drive growth.
Given that internet penetration is at peak levels, revenue from internet ticketing segment is expected to be in low single digit to flattish levels, assuming there are no changes in convenience fee, IRCTC said in a concall.
Analysts View
IDBI Capital on IRCTC
Has a 'buy' rating, with the target price of Rs 744, suggesting an upside potential of 15%.
Expects revenue to continue on growth trajectory, led by focus on e-catering and advertisement and license fees.
Expects dent in margins in the long term due to higher contribution from low margin catering and tourism; margins, however, remain above pre-Covid levels.
Axis Securities On Rites
Has a 'buy' rating, with the target price of Rs 410--implying a potential upside of 7.89%.
Higher capex outlay in the budget 2023-24 for railways and highways has provided the company with large opportunities to grow its business verticals
Expects healthy order book to drive growth.
Key Risks
Competition risks: Companies are moving from nomination based projects to competitive based bidding projects. This will lead to competition from public sector units and private players and can affect order flow and margin levels.
The government has announced plans to improve railway infrastructure. Any slowdown in spending on railway would hurt revenues for these companies.
All these railway companies depend on Indian railways. Any policy change could have an impact on their financials.
As a Subscriber you get
Stories
RECOMMENDED FOR YOU
POPULAR