Is it time to sell or buy Railway infrastructure stocks?

Rising railway infrastructure stocks could see a fall after the railway budget is tabled. Those looking to enter should wait for market corrections

Railway infrastructure sector tops the chart when it comes to extraordinary returns. During the last three months, the Sensex has generated 15% returns. For the same period, rail infrastructure stocks posted returns of more than 100%. So, should investors buy these stocks and participate in the rally, or exit them to book profits?

First, let us understand why these stocks have rallied the way they have. Just like other stocks from the infrastructure sector, rail infrastructure stocks have moved up on the hopes of ‘achhe din’ for the sector. The mention of foreign direct investment (FDI) in railways in the President’s speech, however, is the primary reason behind their rally.

Though FDI may not be allowed in normal passenger and freight trains, it may be allowed in areas such as high-speed train systems and dedicated freight lines. It may also be allowed in suburban corridors and freight lines that connect ports, mines and power installations. Another factor has been the steep increase in railway fares ahead of the railway budget. This has raised hopes that railway infrastructure development projects will be announced in the railway budget.

Investors should, however, note that these pre-budget rallies are common. They should not get caught in them. “Though the size is a bit large this time, this kind of rally happens before every railway budget and usually corrects significantly after the budget,” says Rajesh Agarwal, head of research, Eastern Financials. The rally is only based on hope and not on hard numbers. Though the government is set to collect close to Rs 8,000 crore due to the fare hike, there is no guarantee the entire sum will be pumped into railways for its modernisation. Even if there is a mention of railway modernisation in the railway budget, a number of steps — calling for tenders, awarding them, etc. — have to be taken before implementation actually begins.

And, this will be reflected in companies’ numbers only after two or three quarters. FDI in railways, if allowed, will be a major sentiment booster for the sector. However, most firms are reporting losses now and their fundamentals may not improve simply because of FDI.

What should investors do now? It depends on whether they are holding railway infrastructure shares or thinking of buying them.

“The good news is already priced in. So, investors holding rail-related stocks can book profits before the rail budget. Others can consider getting into fundamentally strong stocks like Titagarh Wagons (BSE 1.37%) and Texmaco, but only after the corrections,” says Agarwal.

Since the railway budget is going to be tabled in the Parliament on July 8, investors have enough time to plan their exit. The opportunity for investors who want to enter these counters may come only after the budget. Now, let us take a closer look at the railway infrastructure firms:

Texmaco Rail and Engineering (BSE 3.98 %)

A key player in the manufacturing of goods wagons in India, Texmaco enjoys a market share of close to 25%. It has expertise in manufacturing standard and custom made wagons for diverse industries including petroleum, chemicals, cement, alumina, transformers, etc. The clamour for self-propelled trains that can be combined together as electric multiple units (EMU) is increasing. Since the railways’ production facility is inadequate, it is being outsourced to players such as Texmaco. To increase its growth prospects, Texmaco is also planning to enter coach building for the upcoming metro systems in various cities.
Is it time to sell or buy railway infrastructure stocks?