No Budget Boost: Will Railway Stocks Lose Steam?

Railway stocks have been one of the biggest outperforming sectors over the last few years. Many railway stocks become multibaggers.

After a great run, investors expected the bullishness to continue.

But things haven't turned out that way. Ever since the Union Budget in July 2024, railway stocks have been under pressure.

This was due to the fact that the government did not increase the railway budget significantly for the financial year 2024-25.

Thus, there were big expectations from the budget this year. The markets expected a significant increase in the allocation for the railways for financial year 2025-26.

On budget day, it was revealed that the allocation for the railways would be the same on an annual basis at Rs 2.65 trillion (tn).

The reason appears to be the spending capacity of the railways. The FY25 allocation wasn't fully utilised. Thus, the government didn't increase the amount for FY26. It appears the government wants the railways to use the allocated funds before raising the allocation further.

This makes sense from the government's point of view. After all, it has a limited amount of resources. Every ministry makes demands for funds for all kinds of projects. The finance minister can only allocate a certain amount of funds every year to all of them.

An important criteria to decide the amount of funds to be allocated to various ministries in the Union Budget is the amount that was actually spent in the previous year.

If there was a gap between the amount allocated versus the amount spent, the government is unlikely to increase the allocation. This is what happened in the railway budget for this year.

Now, all this might seem simple enough but the stock market did not like it.

If the government doesn't increase the allocation of funds to the railway ministry, then all the railway PSUs - IRCTC, RVNL, IRCON, RailTel, IRFC, RITES, CONCOR - as well as the private firms in the sector, won't benefit from an increase in spending on a year-on-year basis.

This is because the growth of the sector as a whole depends on the growth of funds allocated to the railway ministry. If this slows down, then the growth of the entire sector will slow down too.

The stock market understands this dynamic very well. So, it wasn't surprising that railway stocks fell on budget day.

Railway Stocks Performance on 01 February 2025

Sr No	Name	Opening as on 01-02-2025	Closing as on 1-2-2025	1 Day Performance
1	BEML	3,899.80	3,669.80	-5.90%
2	Container Corporation	784.9	755.4	-3.80%
3	Ircon International	223.3	200.9	-10.00%
4	IRCTC	838.4	793.9	-5.30%
5	IRFC	152.7	141.4	-7.40%
6	RVNL	485.6	433.5	-10.70%
7	Railtel Corp Of India	408.6	379	-7.20%
8	RITES	266	254.7	-4.20%
9	Texmaco Rail	200.4	177.8	-11.30%
10	Titagarh Rail Systems	1,040.20	955	-8.20%

Source: BSE

Prior to the budget, there was optimism that the government would enhance capital expenditure for the railway sector. This expectation was based on the sector's significant role in national infrastructure and economic development.

The unchanged allocation has been perceived as a lack of prioritisation for the railways. This led to a sharp decline in investor confidence and a subsequent drop in stock prices.

What Should Investors in Railway Stocks do Now?

First things first.

Investors will have to accept the new reality. Railways is no longer a 'growth' theme in the stock market.

So, investors will have to pay close attention to the valuations of these stocks. The 'growth at any price' strategy will only lead to losses.

A more value oriented approach is needed to evaluate these stocks now.

Second, there is an important point that investors need to understand.

There was an assumption that the funds allocated to various ministries in the budget would be spent in that same year. Thus, the government would be able to increase the allocation in the next budget.

This was taken for granted by investors in stocks across various sectors, the prominent ones being defence, renewable energy, and railways.

But now that assumption has been shattered. The fact is the government can't keep increasing allocation by a big amount every year to every ministry. That's just not possible.

The spending ability of the respective ministry also must be considered. This is not an easy thing to do for most investors. At best we con make educated guesses in this regard.

Investors will either have to accept underperformance from these stocks of consider moving their money to stocks in other sectors.

This is a decision that each investor will have to make based on their investing knowledge, patience, conviction in these stocks, personal risk appetite, asset allocation, investing time horizon, etc. There is no 'one size fits all' solution here.

Also important is the time that investors can put in to investing. Even in thematic investing like railways, investors should evaluate the companies' fundamentals, corporate governance, and the valuations of the stocks as key factors when conducting due diligence before making investment decisions.

Concluding Thoughts

This entire episode has highlighted the importance of valuations.

Buying so called 'growth stocks' at any price, is a high risk investing strategy.

Here's what Rahul Shah, co-head of Research at Equitymaster, had written about the importance of valuations back in November 2021.

• 'If you do not have your own buying and selling limits for stocks, I suggest you start working on them right away based on your strategy and your preferred time horizon.
  
  But do ensure that it is rooted in reality and does not involve paying PE multiples that have often failed to generate satisfactory results over your time horizon.
  
  Mine certainly have and therefore I will stick to them, even if it comes at the expense of missing a multibagger.'

Happy investing.

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