Budget 2019: Railway Stocks see mixed reaction; Texmao Rail, RVNL, Titagarh Wagons down!

Reacting to Budget announcement, shares of Titagarh Wagons, Texmao Rail & Engineering, Texmaco Infrastructure, Hind Rectifiers slipped into negative terrain!

NEW DELHI/MUMBAI: Finance Minister Nirmala Sitharaman might have presented a reformist Union Budget 2019-20, but it failed to impress investors at Dalal Street, especially for the railway-linked stocks, which slipped into negative terrain post the announcement.

Shares of seven companies operating in the railways-related sector saw mixed trend at 11:56 IST on BSE after Finance Minister allowed larger participation of private sector through public-private partnerships in passenger and freight services.

Meanwhile, the S&P BSE Sensex was down by 112.46 points, or 0.28% to 39,795.60.

Railway stocks saw mixed trend. Container Corporation of India (up 0.33%), BEML (up 0.22%) and NELCO (up 0.17%) rose. Hind Rectifiers (down 1.93%), Texmaco Rail & Engineering (down 1.24%) and Titagarh Wagons (down 0.24%) declined.

While presenting Union Budget 2019-20 in parliament today, 5 July 2019, Finance Minister Nirmala Sitharaman said that the Indian Railways is set to allow larger participation of the private sector through public-private partnerships (PPPs) in passenger and freight services.

The railway infrastructure needs investment of Rs 50 lakh crore between 2018 and 2030. PPPs will unleash development in the railways sector, the Finance Minister said. The development targets of the Indian railways cannot be met by the public sector alone, calling for larger participation of the private sector, Nirmala Sitharaman said. The ministry also called for allowing private players to operate passenger trains on important routes in the country and open up rolling stock manufacturing to the private sector, she added. Finance Minister further said a public-private partnership will make services better. “Railway infra would need an investment of Rs 50 lakh crore between 2018 and 2030; PPP to be used to unleash faster development and delivery of passenger freight services,” she said. However, the Sitharaman did not announce any addition to the railway capital expenditure.

Reacting to Budget announcement, shares of Titagarh Wagons, the second largest freight wagon manufacturer in India, were trading lower at Rs 61.20, down 0.33 per cent, on the Bombay Stock Exchange. Texmao Rail & Engineering declined 2.27 per cent to Rs 66.90 in intra-day trade. Texmaco Infrastructure were marginally up at Rs 50, while Hind Rectifiers tumbled 3.23 per cent to Rs 126 on the BSE.

Among other rail-related stocks, Larsen & Toubro (L&T) share price was down 0.11 per cent at Rs 1,569.85 per share. The newly listed state-controlled company Rail Vikas Nigam Limited (RVNL) were also trading in negative terrain, down 0.88 per cent at Rs 28.05 apiece.

Meanwhile, the BSE benchmark Sensex was trading at 39854.7, down by 53.36 points or by 0.13 per cent.

A good run, but watch out for profitability

The change!

The Centre, in an ambitious move, has estimated an investment of 50 lakh-crore till 2030 for developing railway infrastructure. The Finance Minister also emphasised on the need for public-private partnerships to hasten sanctioned works.

For FY20, the budgeted capital outlay of the Railways has been raised to about 1.6 lakh-crore, an increase of 9 per cent from a year ago.

The background

In 2015, the then Railway Minister Suresh Prabhu envisioned transforming the Railways by proposing an investment plan of 8,56,020 crore for five years with emphasis on areas including gauge conversion, network expansion (including electrification), purchase of rolling stock and development of metro rail.

However, the key beneficiary of the Railways’ growth, the wagon industry, has seen inflow of bulk orders only over the past one year. By all accounts, the Railways has released orders for 11,790 wagons in FY19, out of the overall 22,000 required. The order for the remaining 9,000 wagons is expected to be released in FY20.

Despite the order inflow, the profitability of wagon companies remain a concern due to raising input costs and predatory pricing in bids. The Railways, too, continues with its efforts to improve the operating ratio, which measures operational expenditure against revenues. A high operating ratio (lower, the better), at an average of 94 per cent (FY11-12 to FY17-2018), has lead to lower internal accruals for the Railways, making it dependent on budgetary and off-budgetary sources of funds to meet its capital expenditure.

The verdict

Increased capital allocation by the Railways towards capacity creation raised the demand for wagons in the previous fiscal and boosted the top-lines of rail-wagon and coach manufacturers such as BEML, Titagarh Wagons, and Texmaco Rail and Engineering. But the stock performance of most of these firms haven’t been impressive in the past one year on the back of poor profitability.

Though Titagarh’s and the State-run BEML’s revenues grew 9 per cent and 25 per cent, respectively, in FY19, their net profits fell 14 per cent and 1 per cent, respectively. Texmaco has been the outlier as its revenue and net profit grew 79 per cent and 31 per cent, respectively. Kernex Microsystems, manufacturer of railway safety equipment, continues to be a loss-making entity.

For FY20, the budgeted amount for rolling stock has almost quadrupled to 6,114 crore. The prospects of the wagon industry look optimistic with higher allocation, progress of dedicated freight corridors, focus on PPPs and expansion of metro network. However, profitability of these companies has to be closely watched periodically.

Procurement of steel for railway lines would also give boost to the top-lines of steel-makers such as SAIL and JSPL.