Stocks of Wagon manufacturers gain on hopes of a turnaround Railway Budget

Bullish on Railway-linked stocks – Also driving investors to the stocks are signs of improvement in non-railway orders and a belief that the financial condition of the companies cannot get worse than this!

मुंबई Mumbai: Ahead of the railway budget, a familiar story is playing out in the shares of companies that manufacture wagons for Indian Railways. Stocks of Titagarh Wagons Ltd and Texmaco Rail and Engineering Ltd are rising on hopes that the forthcoming railway budget will lift the industry from what one company termed in its annual report as a “state of despair”.

Wagon tenders for 2013-14 were released in April last year. For the current fiscal year, they are not yet released, though tenders are expected anytime now. The funds crunch at Indian Railways means orders are not only seeing inordinate delays, but are also shrinking. Against 16,500 wagons in 2010-11 and 18,000 in 2011-12, the railways is targeting to procure 13,162 wagons in the current fiscal year.

The intervening period has seen a capacity build-up, intensifying competition and driving margins lower. As a result, revenues of the companies halved from 2010-11 to last fiscal year. But as hope springs eternal, many expect the forthcoming rail budget to change this. It is expected to lay a road map for modernization and capacity expansion of the national carrier, which could increase wagon orders.

“The rolling stock division of the company is poised to show improved working with the inflow of orders from Indian Railways, ministry of defence and private sector. The impetus to the rail sector by the government is expected to be reflected in the upcoming railway budget,” Texmaco Rail said early this month.

g_m2m_Wagon_webAlso driving investors to the stocks are signs of improvement in non-railway orders and a belief that the financial condition of the companies cannot get worse than this. Umesh Chowdhary, vice-chairman and managing director of Titagarh Wagons, told the company is seeing order inflows from private firms after a long hiatus.

The orders may be small, but if substantiated by renewed ordering from Indian Railways, then it can help the companies turn the corner, analysts say. Bigger orders can help the companies increase their capacity utilization levels, which are very low right now. Against a capacity of 6,500-7,000 units, Titagarh Wagons reportedly produced less than 1,000 wagons last year. “While (wagon) prices have already fallen to abysmal levels, the cycle is likely to turn as volumes pick up and competition abates,” Religare Capital Markets Ltd said in a note.

That said, it is important that unlike in the railway budget last July, the coming budget gives details on how the government wants to turn around the railways. Investors will look for proposals that can help the companies improve their revenues over the next year. Disappointments on this front can trigger profit-booking in these stocks, considering that both of them have gained more than 60% from the day the current minister took charge.

On railways, clearly there is sufficient progress on the freight corridor. That apart, the focus of this government has been to move expenditure from revenue side to capex side.  From that point of view, Rail Industry do think capital expenditure in railways will be a big thrust area and lot of private players will be able to participate in this entire railways and associated logistics story. So, there is going to be a capex burst for the railway sector and there will be opportunities. Rail Industry shall focus on the relatively front round, well-managed and decent quality companies and there are quite a lot of them in the railway space. So, it does look like a credible place to park your investments in.

Experts opine that “both railway and defence are important space and certainly one will have to look very closely at the individual stocks. Many of the railway stocks have run up ahead of time and valuations are on higher side but the companies are likely to get benefited with higher amount of order inflow coming in from this particular segment.” “The actual impact would happen with a lag of two-three quarters. Therefore, come second half of financial year 2015-16 would see many of the railway stocks would start producing the performance against the expectations that we have at this point. Certainly the market is buying at least a year-year-and-a-half in advance into these companies but this visibility is important and this where market is giving thumbs-up to many of the railway stocks including some of the MNC companies which hold large potential and they are yet to find larger orders coming in. But as and when the sector starts opening up these companies should be getting the lion share out of those orders which would come in. Therefore, the industry would remain positive on railway.” Therefore, to a greater extent industry would believe that there would be inquiries to begin with, orders to begin with but the business would happen with a lag of around two-three quarters but remain positive on them. One will keep looking at individual ideas whenever the market gives opportunity to add them into portfolio into both these spaces, they remain exciting.”