5 Railway Stocks to Watch Out for Pre-Budget Gains

Railway stocks were huge winners in 2023, and the trend continued up until June 2024 on the back of expectations of the continuation of the railway infra capex.

In FY24, the government met 99.9% of its capex target totalling Rs 9.48 trillion (tn), demonstrating a strong commitment to infrastructure.

However, in the first half of FY25, capital expenditure slowed to 37.3% of the annual target by August, down from 49% the previous year, due to general elections and delays in project tendering.

Therefore, it is reasonable to expect that to meet its capex targets the infra spends must pick up pace now.

Also, the consumption demand has slowed down considerably in recent quarters. To address both the slowing capex and the concern about economic growth, the government is urging ministries to speed up their spending.

Public capital expenditure is a crucial driver of economic growth because it creates infrastructure, jobs, and increased demand. When public capex slows, it can negatively impact GDP growth, as there is less investment in the economy.

The finance minister has held review meetings with key ministries, emphasising the need to meet capex shortfalls. The government may also relax cash management limits to facilitate spending. This indicates a clear attempt to use government spending to stimulate the economy.

In the upcoming Union budget 2025, the Indian government may allocate a decent amount for railway capex.

Keeping that in mind, here are 5 railway stocks to watch for pre-budget gains.

#1 Texmaco Rail & Engineering

First on the list is Texmaco Rail & Engineering, a company that manufactures and services rail and rail-related products, with a major focus on freight car manufacturing. They also undertake rail EPC projects, including track laying, signalling, and electrification.

Texmaco also has a steel foundry producing components for freight cars and mining machinery. In addition to these, the company manufactures hydromechanical equipment and loco components.

Coming to its financials, the company has had a 5-year ROE of 4% and a 5-year sales compound annual growth rate (CAGR) of 14%.

But the picture changes if one looks at the 3-year numbers. The 3-year sales CAGR stands at 28%. The net profit has grown at a 110% CAGR over 3 years.

This stock could be one of the key beneficiaries of Increased government spending. The government has been increasing budgetary allocations towards railway projects. The interim budget for FY25 allocated Rs 2.52 tn to the Ministry of Railways, which is the highest ever outlay.

The 2024-25 budget allocation is a substantial increase from the Rs 2.4 tn allocated in the previous year and is 10 times higher than the allocation in FY14. This trend would be expected to continue in the Union budget of 2025.

The Indian Railways is focused on increasing its market share of freight business to 45% by 2030, with the "Mission 3000 MT" plan.

This involves increasing freight volumes. This initiative is likely to drive demand for wagons, creating opportunities for wagon manufacturers like Texmaco. The government also aims to reduce logistics costs.

The government is focused on modernising railway infrastructure, which includes improving wagon designs and integrating the latest technologies.

This emphasis may lead to demand for innovative products, which could benefit Texmaco, given their focus on technology and collaboration.

But looking at the current stock price the market seems to have forgotten or refuses to believe in these huge upcoming tailwinds.

Texmaco is looking to increase exports of wagons and components. The company has received a 3-star export house certification from the Government of India. It is also focusing on the global market and plans to expand exports of foundry products.

Overall, Texmaco is well positioned to benefit from the government's focus on railway infrastructure, which will likely continue through the upcoming Union Budget of 2025.

For more details, check out Texmaco Rail & Engineering's financial factsheet.

#2 Ircon International

Coming second on the list is Ircon International, a public sector company specialising in infrastructure development, with a strong focus on railway projects.

Its main expertise lies in executing railway projects, including electrification, doubling, and construction in difficult terrains.

The company is also involved in the construction of highways, bridges, flyovers, tunnels, metro systems, EHV substations, commercial and residential buildings, and airports.

Coming to its financials the company has had a 5-year ROE of 13% and a 5-year sales CAGR of 21%.

The 3-year sales CAGR stands at 32%. The net profit has grown at a 33% CAGR over 3 years and 16% over 5 years.

The stock has been rangebound in the past year.

Ircon International is positioned to benefit from government initiatives and spending, particularly in the railway and highway sectors.

The government's emphasis on infrastructure development provides significant opportunities for the company.

The government allocated 3.3% of GDP to the infrastructure sector in FY24, with a special emphasis on transport and logistics.

The railway sector contributes significantly to its revenue, with about 83% in FY24. The company has established itself as a leader in the execution of railway projects.

The Indian Railways has a National Rail Plan (NRP) aimed at creating a "future-ready" railway system by 2030, with plans to increase the modal share of railways in freight.

It has the advantage of being the only Central Public Sector Enterprise (CPSE) with credentials in both high-speed rail and dedicated freight corridors. This positions the company well for projects in these areas.

The company has a healthy order book as of September 2024 of Rs 242 billion (bn).

For more details, check out Ircon International's financial factsheet.

#3 RITES

On number three comes RITES a multi-disciplinary engineering and consultancy company. It is a Navratna CPSE that provides services in transport infrastructure and related technologies from concept to commissioning.

The company offers a wide range of services, including:

• Consultancy services in design, engineering, and project management for various infrastructure sectors such as railways, urban transport, roads, and airports.
• Leasing of locomotives and other railway rolling stock. RITES owns a fleet of locomotives that are leased on a wet basis.
• Exports of locomotives and other railway rolling stock, customised to client requirements.
• Turnkey construction projects, providing services from basic and detailed design to construction and commissioning.
• Project Management Consultancy (PMC) for infrastructure projects.

Coming to its financials, the company has had a 5-year ROE of 20% and a 5-year sales CAGR of 4%.

The 3-year sales CAGR stands at 9%. The net profit has grown at a 2% CAGR over 3 years and -1% over 5 years.

Due of this lacklustre financial performance, the stock largely remained rangebound up until 2022. It ran up along with the whole sector but gave up major gains in last year.

This can change given the government's focus on transport infrastructure and last-mile connectivity. It creates opportunities for RITES' technical consultancy services and the export of rolling stock.

This includes projects in railways, urban transport, roads and highways, buildings, ports, land ports, inland waterways, and airports.

Initiatives like the Gati Shakti program and the focus on intercity connectivity and first and last-mile connectivity enhance growth potential for the company.

The company is also looking to expand its international business under the 'RITES Videsh' initiative, which is focused on growing revenue from exports and project consultancy across continents.

It is actively pursuing opportunities in Southeast Asia, Africa, the Middle East, and Latin America.

The company's core strengths in design and engineering, coupled with its experience in providing consultancy and project management, place it in a good position to benefit from these government initiatives and spending.

For more information, check out RITES' financial factsheet.

#4 Indian Railway Finance Corporation

Fourth on the list is Indian Railway Finance Corporation (IRFC) a systemically important infrastructure finance company, with the majority of its shares held by the Government of India through the Ministry of Railways.

It functions as the dedicated market borrowing arm of the Indian Railways, raising funds from both domestic and overseas capital markets to meet the extra budgetary resource requirements of the Indian Railways.

IRFC's primary business involves financial leasing, where it finances the acquisition of rolling stock assets and leases railway infrastructure assets to the Indian Railways.

Coming to its financials the company has had a 5-year ROE of 13.9% and a 5-year sales CAGR of 19%.

The 3-year sales CAGR stands at 19%. The net profit has grown at a 13% CAGR over 3 years and 23% over 5 years.

The stock has seen significant rerating, it listed at a price to book (PB) ratio of 0.8 times, and then swiftly went on to trade at above 5 times PB in 2024.

In the past six months, it has started to derate. Now the stock trades at 3.5 times PB.

The company's role as the primary financing arm for Indian Railways positions it to directly benefit from increased budgetary allocations and capital expenditures for railway projects.

With the government's focus on expanding and modernising the railway infrastructure, there will be a significant need for funding.

This includes projects for new track laying, upgrading existing lines, and introducing modern trains. IRFC is poised to capitalise on these opportunities and increase its lending portfolio.

While it has traditionally focused on railway financing, it is now actively exploring opportunities to diversify into other sectors with forward and backward linkages to the railways, such as ports and logistics, as well as infrastructure projects.

This is expected to yield better margins, which could lead to higher profitability.

The company has consistently exhibited strong financial performance, with steady revenue growth, a low-risk profile, and a zero Non-Performing Asset (NPA) status.

The company's strategic relationship with the Ministry of Railways helps maintain a low cost of borrowing. IRFC also benefits from a zero-tax status.

For more information, check out Indian Railway Finance Corporation's financial factsheet.

#5 Container Corporation Of India

Fifth on the list is Container Corporation Of India (CONCOR) a multi-modal logistics company and a Navratna CPSE under the Government of India's Ministry of Railways.

CONCOR is a market leader in the containerised rail freight business. The company's business involves providing inland transport of containers by rail. It has also expanded into managing ports, air cargo complexes, and establishing cold-chain facilities.

It holds a dominant position in the containerised rail freight business in India, with a market share ranging from 65% to 70%.

Coming to its financials the company has had a 5-year ROE of 9% and a 5-year sales CAGR of 4%.

The 3-year sales CAGR stands at 10%. The net profit has grown at a 32% CAGR over 3 years and 1% over 5 years.

Looking ahead, CONCOR is actively developing new terminals, including multi-modal logistics parks (MMLPs), to expand its infrastructure and service offerings. It aims to have more than 10 MMLPs in the pipeline.

It is also focused on developing terminals with large capacities, such as the Dadri terminal, which they are aiming to make a 1 million TEU terminal.

It is enhancing double-stack operations to utilise its rolling stock more efficiently and to reduce logistics costs. The company has been increasing the number of double-stack trains and is seeing growth in this area.

The Dedicated Freight Corridors (DFC) presents a significant opportunity for CONCOR to increase its volumes and reduce transit times. The connection of DFC to JNPT is expected to drive growth and provide cost benefits to customers.

To date, 93 % of the DFC has been commissioned and it is expected to be fully commissioned by December 2025.

Government policies and budgetary allocations can significantly impact the logistics sector. Any announcements related to infrastructure development, rail projects, or tax incentives in the budget could positively affect CONCOR.

For more information, check out Container Corporation Of India's financial factsheet.

Conclusion

Given the anticipated increase in railway capex in the upcoming Union Budget 2025, investing in railway-related stocks may offer potential pre-budget gains.

The government's strong focus on infrastructure development, coupled with initiatives like the NLP and DFCs, provides a favourable environment for these companies.

However, it's crucial to acknowledge that the government may face fiscal constraints, limiting its ability to allocate more funds to railway capex.

While the government has increased capex on railways in the past, there is no guarantee that this trend will continue, especially with competing demands from other sectors such as healthcare, education, and defence.

Therefore, it's important to conduct thorough research on financials and corporate governance before making investment decisions, ensuring they align with your financial goals and risk tolerance.

Happy investing.

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