Pros and Cons of Investing in the Stock of RVNL Right Now

Indian railway stocks have been doing very well since 2023.

In last year's Union Budget, the railway sector was the biggest beneficiary. A record Rs 2.4 trillion (tn) was allocated for the Indian railways. Since then, there has been no looking back for these stocks.

Improving India's railway infrastructure is now one of the government's top priorities. The regulatory environment lacked clarity before. But this has now changed... and the stock market has noticed.

Now railway stocks are back in the news once again. Reports suggest the government could introduce a production-linked incentive (PLI) scheme for train components. This is part of the effort to attract further investments, boost domestic manufacturing and reduce dependence on imports.

Here's what Rahul Shah, co-head of research had to say about railway stocks...

• If India must grow at 8-9% on a consistent basis, we need to invest in all kinds of infrastructure, including rail. And if rail infrastructure is given a massive push, sector companies will be among the prime beneficiaries.
  
  As per estimates, the country is well on its way to construct more national highways and rail lines in the decade between 2015-2025 than it has cumulatively done between 1950 and 2015.
  
  Huge capex announcements have already been made and more are in the offing. In fact, quarterly results for these stocks are already sending out feelers about the good times ahead.

One railway stock in particular has been on fire recently.

The stock price of Rail Vikas Nigam Ltd (RVNL) is up 60% in the last one month. It was up over 2% intraday today.

In this editorial, we will look at the pros and cons of investing in the stock of RVNL right now.

Pros

#1 Ambitious Plans of the Indian Railways

The railways' plans to lay about 100,000 km of new track over the next 20-25 years.

Last year, in a big push to reduce dependence on imports, the railways gave a procurement order for 1.54 million (m) forged wheels that are made in the country.

The government has also approved the Rs 576.13 billion (bn) green mobility scheme, seven multitracking rail projects worth Rs 325 bn to add 2,339 km of track, and an upskilling and concessional credit scheme worth Rs 130 bn.

The Indian Railways has announced plans to manufacture 10,000 AC coaches over the next two years to improve facilities for common passengers. The overall count of non-AC coaches will increase by 22% in this period, as per Northern Railway.

In 2024-25, it will produce 2,605 general coaches, 1,470 non-AC sleeper coaches, 323 sitting-cum-luggage rake (SLR) coaches, 32 high-capacity parcel vans, and 55 pantry cars. These coaches, designed to enhance passenger comfort, include general, sleeper, and SLR coaches for Amrit Bharat trains.

For 2025-26, the plan includes 2,710 general coaches, 1,910 non-AC sleeper coaches, 514 SLR coaches, 200 high-capacity parcel vans, and 110 pantry cars. The focus is on ensuring adequate and improved facilities for non-AC passengers and meeting seasonal demands.

#2 Vande Bharat and Metros

The company has received a letter of agreement from the Ministry of Railways for the manufacturing and maintenance of Vande Bharat train sets.

This order includes the upgrade of the government manufacturing units and train-set depots. The agreement involved a quantity of 200 train sets, with a cost per set of Rs 1,200 m.

As part of its growth plans, RVNL is expanding into metro line development in major cities and suburban networks.

RVNL in consortium with Siemens India, emerged as the lowest bidder (L1) for Mumbai Metro line 2B of Mumbai Metropolitan Region Development Authority (MMRDA). The project is estimated to cost around Rs 3.8 bn.

Additionally, the company will construct 6 elevated metro stations for the Mumbai Metro in an order worth Rs 1,873.4 million (m).

The same consortium has bagged two separate orders from Gujarat Metro Rail Corporation. The orders are for Surat Metro Phase 1 (over 40 km covering 38 stations and 2 depots) and Ahmedabad Metro Phase 2 (over 28 km covering 23 stations and 1 depot).

The company also won an order from Bangalore Metro Rail Corporation for the electrification of Phase 2A and 2B of the city's metro network.

Earlier this month, it signed an MoU with Delhi Metro Rail Corporation (DMRC). This agreement involves participation in upcoming projects in India and abroad.

Under this MoU, the company will be a project service provider for metro, railways, high-speed rail, highways, bridges, tunnels, buildings, workshops or depots, S&T works, and railway electrification.

#3 Excellent Order Book Position

The company's order book at the end of March 2024 is staggering Rs 850 billion (bn). This is a 51% growth from its order book at the end of March 2023 which was Rs 560 bn.

The company has been on a roll recently, winning orders left, right, and center. Apart from the ones mentioned above, the company has won the following orders over the last few months:

• Two orders from the South Eastern Railway for 132 KV traction substations worth Rs 2 bn and 1.9 bn.
• Two orders from the Central Railway for OHE modification work; the first between Wardha and Ballarshah for Rs 1.3 bn and the second between Amla and Nagpur worth Rs 1.4 bn.
• A Rs 0.7 bn order from North Central Railway for automatic signalling between Dhaulpur and Gwalior.
• A Rs 1.6 bn order from Southern Railway for automatic signalling between Ernakulam Junction and Vallattol Nagar.
• A Rs 1.6 bn order from East Coast Railway for an automatic block signalling system.

RVNL has now started participating in tenders of other countries as well.

It signed memorandum of understanding (MoU) with Tatweer Middle East & Africa LLP to develop joint capabilities in design and execution of rail based work in the Middle East and European countries.

The company entered into an agreement with IMS Consultancy in Nepal to get technical and advisory services in the field of railways, tunnels, roads, bridges, building works, airports, ports, irrigation, power transmission and distribution sector, solar sector, wind sector, and hydropower sector.

The experience of around two decades in India of being one of the lead execution agencies for railway projects would help the company to evaluate, bid and execute projects in other countries.

Beyond geographical expansion, RVNL is also forging partnerships within the rolling stock manufacturing sector, solidifying its position in the rail ecosystem.

What's more, with the recent recognition as a Navratna company, RVNL has greater autonomy in project execution, capital expenditure and international ventures.

Cons

#1 Heavily Dependent on the Indian Railways

The company's revenue is almost completely tied to the capital spending of the Indian Railways.

While this is a positive in the short term, as the railways is on a spending spree, it also makes the company's growth vulnerable in the long term. Any slowdown on the railway capital expenditure will hit the company hard.

Also, it's important for investors to understand that the capital expenditure of the Indian Railways has to be approved and then funded by the ministry of railways, i.e., the central government.

This means the fortunes of a company like RVNL is largely dependent on the amount that is annually allocated to the railways in the Union Budget.

If there is any slowdown in this regard, RVNL stands to lose out on potential growth opportunities.

#2 High Valuations

No matter how good the fundamentals of the business may be, investors who are interested in buying a stock should pay close attention to its price ratios.

And this is where the concerns come to the fore. The stock's price to earnings (PE) ratio and price to book (PB) ratio of RVNL are almost 90 and 15, respectively. These numbers clearly point to the fact that the stock is expensive.

Instead of getting excited investors should be cautious about the spectacular rise in the stock. Over the last two years, the stock is up more than 20 times. It's up more than 4 times in the last one year. This has taken the stock's PE ratio up from around 20 at this time last year, to nearly triple digits today.

About RVNL

Rail Vikas Nigam Ltd (RVNL) is a Navratna Indian public sector undertaking which works as the construction arm of the Ministry of Railways for project implementation and transportation infrastructure development.

It was incorporated in 2003 to meet the country's surging infrastructural requirements and to implement projects on a fast-track basis.

The company takes up project management starting from conceptualisation to commissioning, including stages of design, preparation of estimates, calling and award of contracts, project and contract management, among others.

Over the last 20 years, it has contributed to over 35% of railway doubling and more than 25% of the railway electrification done in India.

For more details, see the Rail Vikas Nigam fact sheet and quarterly results.

More on Indian Railway Stocks

If want to profit from the great Indian railway boom, here are links to some useful articles.

• Railway Penny Stocks in India
• Multibagger Railway Stocks
• Fundamentally Strong Railway Stocks
• Debt Free Railway Stocks
• Undervalued Railway Stocks
• Best Smallcap Railway Stocks
• Top Railway Growth Stocks

Also, watch this video by Equitymaster's smallcap guru, Richa Agarwal, on stocks that could ride the railway capex cycle.

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...