Top 5 Railway Stocks to Watch Out for in 2023

In November 2022, we wrote to you about why railway stocks are rising and what lies ahead.

Stocks involved in the railway segment were the talk of the town and witnessed a staggering rally of over 50%. Investor sentiment was high on the back of announcements expected related to the sector in the upcoming budget.

Another reason for excitement in the sector was due to the hope of meaningful divestment in public sector rail units.

With the Finance Minister set to announce the Union Budget 2023-24 on 1 February 2023, railway stocks could again gain some traction on the back of the government's various plans for modernisation and expansion in the future.

Here are 5 railway stocks to watch out for in 2023.

#1 Titagarh Wagons

First on our list is Titagarh Wagons.

The company is mainly engaged in the manufacturing and selling of freight wagons, passenger coaches, metro trains, ships, etc.

It is one of India's largest wagon manufacturers, with a capacity of 8,400 wagons per annum.

How do the company's financials fare?

Titagarh receives a large portion of its revenue from the Indian Railways. Yet, its revenue has grown at a meagre 4% over the last three years (CAGR). It has also not delivered any profits during the same period.

The company's return ratios, as a result, are poor. Its return on capital employed (RoCE) stood at 7.2% in the financial year 2022.

However, the company has a strong order book now with the government's push on expanding rail infrastructure.

In May 2022, the company received the single largest order for 24,177 wagons from Indian Railways amounting to Rs 78 billion (bn).

As of September 2022, the company had an order book of over Rs 100 bn. Around 86% of the order book consisted of freight rolling stocks and 11% of it came from passenger rolling stocks.

On the back of these orders, the company reported a 77% YoY growth in revenue for the September quarter. Net profit jumped 6.5x to Rs 450 million (m).

The company is aiming to participate in more metro orders over the next year. It is looking to diversify its customer profile, which is dominated by Indian Railways at present.

To know more about the company, check out its financial factsheet and latest quarterly results.

#2 Texmaco Rail and Engineering

Second on our list is Texmaco Rail and Engineering.

Texmaco Rail & Engineering is an engineering infrastructure company involved in the business of manufacturing rolling stock, hydro-mechanical equipment, steel castings & construction of Rail EPC, bridges, and other steel structures.

The company is a part of the Adventz Group.

Texmaco's revenue has seen a degrowth of 3% in the last three years due to poor off-take of wagons by the Indian Railways. Its profitability, too, has been inconsistent.

The company reported a loss of more than Rs 690 million (m) in the financial year 2020 as it made a provision of Rs 1.5 bn on account of impairment of assets of the Rail EPC - Kalindee Division.

Like Titagarh, the company doesn't have strong return ratios either. Its RoE stood at 1% in the financial year 2022 while RoCE stood at 6.4%.

However, it has a strong orderbook which is expected to drive growth in the future.

In May 2022, Texmaco received an order for 20,067 wagons from the Indian Railways with a value of Rs 64.5 bn. Apart from supplying wagons to Indian Railways, the company has been receiving large orders for commodity specific wagons from private sector companies.

For the September 2022 quarter, the company reported a 29.6% YoY rise in revenue. Net profit more than doubled to Rs 150 m.

Texmaco is currently focussing on improving the productivity, quality, efficiency, of its existing two plants, to meet the increase in demand.

Its consolidated orderbook stands at Rs 93 bn as of September 2022.

To know more about the company, check out its financial factsheet and latest quarterly results.

#3 Indian Railway Finance Corporation (IRFC)

Third on our list is Indian Railway Finance Corporation (IRFC).

The company is the financing arm of the Indian Railways. It is a Government of India Enterprise, under the Ministry of Railways (MoR).

IRFC's principal business is to borrow funds from the financial markets to finance the acquisition/creation of assets which are then leased out to the Indian Railways.

On the back of rising disbursements, IRFC's revenue has grown at a CAGR of 22% YoY in the last three years while its net profit has grown at a CAGR of 39% YoY.

Its RoE is healthy at 15.8% while RoCE stands at 5.1 as of March 2022.

While its mandate is to provide Rs 66.5 bn of low-cost funds for the national transporter, this amount might see an increase given the aggressive spending by the railway ministry.

As of October 2022, the ministry already utilised 93% of the Rs 1.37 tn budgetary allocation it received for the financial year 2022.

According to the supplementary demand for grants made by the ministry, the government has sought Rs 120 bn more for this fiscal year.

For the September 2022 quarter, the company's revenue from operations rose 24% YoY while net profit grew 14% YoY.

The government is likely to sell 11% stake in IRFC by the financial year 2024 as part of its disinvestment plan.

The ministry of railways currently owns 86.4% stake in the firm. The intent is to bring the government's stake down to 75% by 2024.

To know more about the company, check out its financial factsheet and latest financial results.

#4 Railtel Corporation of India

Fourth on the list is Railtel Corporation of India

The company is one of the largest telecom infrastructure providers in the country. It is owned by the Government of India under the Ministry of Railways (MoR).

This gives it the privilege of owning the exclusive right to lay optical fibre cables and provide telecom-related services along the 60,000-route km of the Indian Railways' network.

Through this setup, it offers a telecom infrastructure that can host other telecom players at railway stations.

Besides, it offers diversified services that include telecom networks, data centre, and hosting services, and project execution.

Railtel has been consistently profitable since 2007 and is financially self-sufficient. It enjoys the highest net profit margin among key telecom companies in India and highest operating margin among key IT/ICT companies in India.

The company's revenue has grown at 16% CAGR over the last three years. Net profit has grown at 23% YoY. It has strong return ratios with RoE at 14.2% and RoCE at 19.7%.

It also enjoys a debt free balance sheet.

With an experience of over two decades and strategic relation with Railways, RailTel has been selected to implement government projects including rolling out the National Knowledge Network (NKN), Bharat Net and USOF (Universal Service Obligation funded) optical fibre-based connectivity project in North-East (NE) India.

The company has signed a memorandum of understanding (MoU) with the Indian Railways for the installation of an IP-based video surveillance system at 6,049 railway stations across the country.

The proposed plan is part of the government's flagship 'Digital India' initiative, which looks to upgrade technology initiatives at key government departments.

In its latest quarterly results, the company reported a 19.6% YoY increase in revenue. Net profit fell 19% YoY as expenses rose.

To know more about the company, check out its financial factsheet and latest quarterly results.

#5 Container Corporation of India (Concor)

Last on our list is Container Corporation of India.

Container Corporation of India, popularly called Concor, is India's largest railway logistics company. It handles nearly 75% of the containers transported via railways.

Rail container transportation is a capital-intensive business and Concor has an enviable first-mover advantage in this segment. Until 2006, it was the sole operator in the industry.

Since 2006, other players have entered this industry but none of them have been able to replicate the network and infrastructure that Concor has.

The market share of Concor stands at 75%. Using its huge economies of scale, Concor enjoys distinct pricing power. A pan India network also makes it the lowest cost service provider.

Concor's revenue and profit growth have been impacted in the last three years due to the pandemic. Its return ratios have also been weak as a result.

The company's RoE stood at 10.1% in the financial year 2022 while RoCE stood at 13.8%.

In the latest quarterly results, Concor reported an 8.1% YoY increase in revenue. The company's net profit rose by 20% YoY.

The operations for the DFC (Dedicated Freight Corridor) project have begun from the company's Khatuwas terminal. It plans to have 50 rakes (currently 12) of 25 tons axle by the end of the year.

To know more about the company, check out its financial factsheet and latest quarterly results.

To conclude

In the upcoming budget, the railways has reportedly sought a gross budgetary support of Rs 1.5-1.8 tn over the Rs 1.37 tn figure earmarked during Budget 2022-23.

The allocation could be the highest ever with the likely announcement of around 300-400 new Vande Bharat trains.

Part of the said allocation could also be used towards building new tracks in view of the railways' ambitious plan to lay about 100,000 kilometres of new tracks over the next 20-25 years.

With so many triggers for growth, railway stocks could see their share prices considerably over the near term. However, note that, the financials of many of these companies are weak.

Conduct thorough research before you invest in any of them. Sustained research must not be compromised despite the positive odds.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...