Why Are Railway Stocks On The Rise? Union Government’s Solid Capex Push Is Driving Investor Interest

Stocks of government-owned railway companies have given double-digit returns over the past month alone. 

Rail Vikas Nigam Limited (RVNL) zoomed by 70 per cent in one month, indicating strong investor interest in the sector. Railway financier, IRFC, is up by 31 per cent, and RVNL is up by 46 per cent. Titagarh Wagons, a private company, has seen its stock double over the last year. 

Railway stocks had been trading at low valuations with single-digit price-to-earnings ratios and good dividend yields. The lack of growth and government ownership had kept these stocks at low valuations. However, with the government’s push on railway capex, there is increased investor interest in railway stocks. 

In addition, with the union budget around the corner, investors are betting on favourable policies and fund allocation towards the railways. The upward movement of railway infrastructure-related stocks, rather than railway operations stocks like IRCTC, indicates that the markets are betting on the positive capex momentum.

Capex Expected to Drive Earnings Growth

Between 2014 and 2022, the funds allocated towards railway-related capital expenditure have grown from around Rs 50,000 crores to Rs 2.45 lakh crores. 

Total capex spending on the railway side for the first half of the current financial year stood at Rs 88,548 crores, an increase of nearly 91 per cent from Rs 46,261 crores spent in FY22’s first half. This is nearly double the growth seen in overall capital expenditure, which grew 50 per cent, from Rs 229,351 crores to Rs 342,889 crores during the first halves of FY22 and FY23, respectively. The total budgetary allocation to railway capex stood at Rs 1,37,100 crores. 

The railways finalised the largest acquisition of 75,000 wagons for Rs 27,000 crores over the next three years. In addition, the government is considering introducing 300-400 new Vande Bharat trains in the 2023 budget. 

With capital expenditure in the sector picking up, investors believe that railway stocks are likely to benefit from the wave of capex. 

Some companies have already seen their top and bottom lines increase significantly. For instance, IRCON has seen a 36 per cent growth from the pre-pandemic era in its revenues. IRFC has seen more than 50 per cent growth in its revenues in FY22 compared to the pre-pandemic financial year FY20. 

As highlighted earlier, these stocks were trading at low valuations for a long time, with IRCTC being the only railway stock that commanded a premium valuation. Being PSU stocks, all of these stocks pay dividends and currently offer a high dividend yield of around four to five per cent. The low valuations, combined with solid catalyst (capex) in place and the positive expectations from the budget, are likely to have caused the dramatic increase in stock prices.

Despite Increasing Capex, the Railway Sector Still Faces Issues

Despite the government’s increasing focus on capex, the sector has been losing its share to road and air transportation. The railways’ share in total freight traffic has come down from around 89 per cent in the 1950s to around 28 per cent currently. In comparison, 40 per cent of long-distance freight volumes are carried by trains in the USA. The railways have been unable to recover share from air and road travel – implying that the expenditure so far might not have been as fruitful in helping the railways claw back market share.

However, there are signs that things might be changing. One of the ways the railways could take away passenger segment share from air travel is the introduction of high-speed trains. The railways have been working on introducing high-speed trains that offer convenience and speed, with ticket prices comparable to or lower than air travel. 

The Railways have been working on making their infrastructure more capable of transporting various types of goods. Recently, with the rise in SUV sales, the railways have been modifying their wagons and changing infrastructure to make trains a better option for transporting cars from factories. These efforts are bearing some fruit since transportation of vehicles by train is already up 68 per cent compared to the last year. 

Hopefully, the current round of capital expenditure would help the Indian Railways gain transportation share from road and air transportation.