Top 6 Railway Kavach Stocks Back in Limelight with 10,000 Kilometres Pipeline

Editor's Note: Post Covid, the increased budgetary allocation towards improving railway infrastructure in India has led to a fast rise in the stocks involved in this sector.

But time and again, a few tragic accidents have derailed this growth story.

Enter Indian Railways Kavach System!

Kavach plays a crucial role in avoiding accidents through a high-tech signalling system.

It works as a shield in an emergency, applying brakes automatically when the driver fails to take required action.

The Indian government is rapidly working towards strengthening rail infrastructure and technology over its vast network. Developments are in full swing to implement the Kavach system.

The centre has planned to implement Kavach technology over 36,000 kilometres by the year 2030.

To achieve this ambitious goal, some of India's prominent players are making multiple efforts in the field. And these efforts are not going unnoticed by Mr Market. Earlier this week, a new player was listed on the Dalal Street - Quadrant Future Tek - a small company developing advanced train control and signalling systems for the Indian Railways under the Kavach project. Following a blockbuster listing (50% gains), the stock price has rallied 50% more in just three trading sessions. (read more about it below)

The government's focus on transport infrastructure, railways in particular, has boosted sentiment.

In June 2024, when India was jolted by a train collision in West Bengal, Indian railways had amped up its targets for the installation of Kavach system across 10,000 kilometres (km).

Back then, we wrote about the companies involved in the implementation of Kavach system and their plans for the future.

Continue reading...

Top 6 Railway Kavach Stocks Back in Limelight with 10,000 Kilometres Pipeline

Stocks including HBL Power, Kernex Microsystems, KEC International, Railtel Corporation, and Siemens are having a big moment all out of a sudden in 2024.

You see, India was jolted by a train collision over the weekend in West Bengal.

The incident occurred when the Sealdah-bound Kanchenjunga Express was hit by a goods train.

This unfortunate event has brought sharp focus to the imperative need for robust safety mechanisms to prevent such tragedies.

Consequently, the stock prices of stocks manufacturing anti-collision devices have experienced a remarkable surge.

Before delving into the specifics of these stocks, let us take a brief look at what the Kavach system entails.

Railways Kavach Back with a Robust 10,000 km Pipeline

In a big boost to the railways sector, the Indian Railways has amped up its targets and it will now issue tenders for the installation of Kavach across 10,000 kilometres (km).

This will be implemented across Railway network but over a longer period.

At present, the indigenously developed automatic train protection system is functional in 1,500 km of train route. Whereas the Indian Railways manages a total route length of approximately 110,000 km according to reports.

The BJP has made no secret of the fact that they want to upgrade India's railway infrastructure with their over Rs 1 trillion capex plan.

The party's election manifesto for next the 5 years not only has 2 full pages dedicated to this, but also promises to extend usage of the critical "Made in India" Kavach System.

Here's an extract:

• We have indigenously developed Automatic Train Protection System Kavach and are rapidly expanding its coverage.
  
  In the next few years, we will expand the manufacturing, design, and installation of Kavach in "Mission Mode" just as we electrified the Railway network.

Kavach plays a crucial role in avoiding accidents through a high-tech signalling system.

It works as a shield in an emergency, applying brakes automatically when the driver fails to take required action.

With that detailed explainer out of the way, let's look at 5 stocks set to benefit from this government's safety mechanisms push.

#1 HBL Power

HBL Power Systems was incorporated in 1983 to manufacture and service different types of batteries, e-mobility, and other products.

The business strategy of the company is to identify technology gaps in India and fill them via their intellectual capital.

The company focuses on creating technology solutions that address challenging applications for key user sectors such as telecom, UPS, railways, power, oil & gas, industries, and defence.

In its electronics division, the company has 2 flagship products - TCAS (Train Collision Avoidance System) for safety and TMS (Train Management System) for efficient track utilization.

In 2021, the Indian government adopted TCAS as the national Automatic Train Protection system, renaming it Kavach. So you can imagine how HBL Power stands as the biggest beneficiary of this rollout.

The company has already secured many contracts and bids for deploying TCAS and TMS across various railway routes and divisions, including the eastern dedicated freight corridor.

With the increasing emphasis on electrification and sustainable energy solutions in the railway industry, it plans to adopt advanced technologies and modernize their operations.

Apart from railways, the company also has a strong growth plan for its batteries segment.

The company has been investing in the in-house development of all the technology parts for motors and controllers since 2017.

HBL Power plans to convert old diesel highway trucks to electric drive using their in-house manufactured motors and batteries.

The sales may begin to kick in from FY25. Though there are a large number of old trucks, the company's solution will only be suitable for a few of them.

The management has said that there's huge scope in this space. At present, there are no competitors as there is no subsidy for electric trucks.

In the past 1 year, share price of the company has shot up by 234%.

For more details, see the HBL Power company fact sheet and quarterly results.

#2 Kernex Microsystems

Kernex Microsystems is one of the major companies providing transport-related equipment and services.

It's a software development and consultancy company engaged in the manufacture and sale of safety systems like anti-collision devices for railways and software services.

The company is in the business of designing, developing and deployment of train collision avoidance systems in Indian Railways.

The company holds an exclusive license for the manufacturing, installation and maintenance of anti-collision systems in India.

Kernex Microsystems has been involved in various projects with Indian Railways and other railway authorities. They have contributed to the modernisation and improvement of railway safety and signaling infrastructure in India.

Earlier this year in February, there were talks about global conglomerate Alstom along with other industry players engaged in discussions to acquire a controlling stake in Kernex Microsystems.

Although the company has strong growth prospects owing to the Kavach system, one must note that it's a loss-making company.

Nevertheless, shares of the company have gained 24% in the past 1 year and currently locked in the 5% upper circuit.

#3 KEC International

Next on this list is KEC International.

KEC International is a global infrastructure EPC major with presence across verticals including power transmission, railways, civil, urban infrastructure, solar, among others.

The company leverages its expertise in transmission tower infra to integrate the Kavach system within railway networks and tracks.

The company won 2 orders back in 2023 worth Rs 6 billion (bn) for implementation of Kavach system.

Coming to recent developments, the management did highlight some concerns about KEC missing out on order inflow targets due to deliberate decisions and renegotiations.

For this year, KEC is targeting around Rs 250 bn worth order inflows with expectations of a turnaround in the railway business in FY26.

Apart from the high growth railway segment, it has an order book of Rs 3 bn for its solar segment.

Though it is not aggressively expanding the solar segment in FY25, the management is confident about taking 2-3 projects.

In the past 1 year, KEC International share price has rallied over 60%.

#4 Railtel Corporation

Next on this list is RailTel.

RailTel is contributing to the implementation of Kavach by partnering with Quadrant Future Tek Limited.

This collaboration aims to explore and deliver Kavach projects for Indian Railways and abroad.

RailTel's expertise in railway signalling and telecom engineering, combined with Quadrant's technology and innovation-driven approach, enhances the development and implementation of Kavach system.

The company enjoys a unique privilege - the exclusive right to lay optical fibre cables and provide telecom services across the massive Indian Railways' network.

Beyond this core function, RailTel has diversified into telecom networks, data centres, and hosting services and project execution.

RailTel's financial performance paints a compelling picture of stability and profitability.

Between 2019-2023, the sales and net profit have reported a 5-year CAGR of 14.2% and 3.7%, respectively.

The company even maintains a debt-free balance sheet, a significant advantage in today's economic climate.

Railtel's experience of over two decades, coupled with its strategic relationship with Indian Railways, positions it as a preferred partner for government projects.

The company has been entrusted with implementing critical initiatives like the National Knowledge Network (NKN), Bharat Net and the USOF-funded optical fibre connectivity project in North-Eastern India.

Its collaboration with Indian Railways also extends to the installation of an IP-based video surveillance system at more than 6,049 railway stations across the country.

In the past 1 year, shares of the company have rallied more than 240%.

#5 Siemens

Siemens is a new addition to this list.

The Indian government recently gave approval for multi-national companies to deploy Kavach system on Indian Railways.

Siemens is in the process of being listed as a vendor for its implementation.

The Indian arm of the largest industrial manufacturing company in Europe, Siemens India operates as an electric equipment manufacturer.

Siemens has a long history of providing cutting-edge railway technology, making it a valuable partner for Indian Railways.

It's multifaceted approach positions them as a one-stop shop for Indian Railways' technological needs.

In January 2023, the company won its biggest-ever railway order. It won an order of around Rs 260 bn.

It includes an order of 1,200 locomotives from the Indian railways. These 1,200 locomotives will be delivered over the period of 11 years followed by a maintenance period of 35 years.

Apart from railways, growing electric vehicles (EVs) industry also gives a growth opportunity to Siemens.

The recent earnings report of Siemens suggests that it's all set for another year of bumper earnings as private capex turns around the laggard cycle.

The company's order book and earnings growth anticipated over the next two years suggests that the best is yet to come.

The management of Siemens intends to be a part of the process of developing an efficient railway sector and in return gain big orders.

In the past 1 year, Siemens share price has rallied more than 100%.

#6 Bharat Electronics

Last on this list is Bharat Electronics.

Bharat Electronics caters to the Indian armed forces providing radar, communication and electronic warfare equipment.

The company's product portfolio is quite diverse, encompassing defence and non-defence products such as software and electronic manufacturing services.

Last year in September 2023, Bharat Electronics joined hands with the Delhi Metro Rail Corporation to develop an indigenous communication-based train control (i-CBTC) system.

The team has commenced work at the i-CBTC lab of the Delhi Metro Rail Corporation (DMRC) and will soon develop and deploy a prototype i-CBTC product on a "designated test track" within the DMRC network.

This partnership marks BEL's entry in the railway control signalling systems.

Over the years, the company has established multiple growth drivers by developing a robust infrastructure, fostering strong relationships with government entities and venturing into non-defence sectors to create new avenues for expansion.

Bharat Electronics currently has an order book of around Rs 759 bn.

The company is anticipating an order inflow of around Rs 700 bn over the next two years, up from their previous forecast of Rs 500 bn.

This revision is driven by a potential new order of Rs 300 bn for the Quick Reaction Surface to Air Missile (QRSAM) system from the Indian Army and Air Force.

In the past 1 year, BEL share price has surged 155%.

#7 Quadrant Future Tek

The seventh stock on this list, which is a relatively new player on Dalal Street is Quadrant Future Tek.

This company develops some advanced level train control and signalling systems under the Kavach project for Indian Railways.

It also operates a specialty cable manufacturing facility with an Electron Beam Irradiation Centre. These cables are used in railway rolling stock and the naval-defence industry.

Moreover, Quadrant is such a research-heavy company that it has full infrastructure for producing solar and EV cables, along with a facility for manufacturing and testing specialty cables and hardware for the Train Control and Signalling Division.

As of FY24, the wires and cables segment for railways sector comprised of 77% of its total revenue while the rest came from the defence segment.

With its recently concluded IPO, the company raised Rs 2.9 bn and was listed on 14 January 2025.

In its red herring prospectus, the company mentioned that it will use the funds from the IPO to support long-term working capital needs for the specialty cable division, capital expenditure for developing an electronic interlocking system, and repayment of working capital term loans.

Coming to its financials, over the past 3 years, Quadrant Future Tek's sales and net profit have grown at a compounded annual growth rate of 28% and 45%, respectively.

Financial Snapshot

Rsm, standalone	FY21	FY22	FY23	FY24
Net Sales	728	1,043	1,528	1,518
Growth (%)	-	43%	47%	-1%
Operating Profit	113	95	265	367
OPM (%)	16%	9%	17%	24%
Net Profit	48	19	139	147
Net Margin (%)	7%	2%	9%	10%
ROE (%)	35.1	13.3	61.8	40
ROCE (%)	15.1	8.4	22.9	23.1
Dividend (Rs)	0	0	0	0
Debt to Equity (x)	3	5.2	2.5	1.9

Source: Equitymaster

Quadrant has secured a Rs 9.8 bn contract for the Kavach system, under which it plans to fit 1,200 locomotives by FY26. The execution timeline for these orders is by Q3FY26.

The Kavach systems are designed to prevent train collisions by using pulse generators for real-time train location tracking. Indian Railways plans to equip 80,000 km of track with this system by 2029. This huge growth trajectory suggests Quadrant Future Tek is in for a fast ride.

The company's e-beam cables help reduce train weight, improving energy efficiency. The weight reduction per coach is 500 kg, leading to 10,000 kg savings per train. There's a good possibility that Indian Railways may mandates these cables for its future projects.

For more details, check out Quadrant Future Tek's financial factsheet.

In Conclusion

The government's plan to deploy the Kavach system across the vast rail network presents a significant opportunity for these companies.

However, there have been several hurdles over the past few years. Slow execution has resulted in the industry facing scrutiny and getting backlash.

Railways Minister Ashwini Vaishnaw had to personally address concerns about slow implementation and ensure progress is on track.

But things are changing, and everyone can relax and get on the back seat as Indian companies have been excellent in the past two years with their execution.

Most of them have doubled or tripled down on technology and innovation and are still improving.

India is creating new products and services to become self-reliant and ultimately the leaders.

Many things won't work. That is perfectly fine. It's the grow or die mentality that matters the most.

Hope everyone has a great day, 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...