Top 5 Rail Stocks that Could be a Hot Investment

Over the past month, railway stocks have been on the radar of investors. And for good reason.

The government is planning to introduce a production-linked incentive (PLI) scheme for train component makers as part of its efforts to attract foreign manufacturing firms and reduce dependence on import.

The PLI scheme being considered for the railways is in line with the government's plan of having only two types of passenger coaches in Indian Railways -- Linke Hofmann Busch (LHB) and Vande Bharat -- down from 28 at present.

India continues to import critical components of rolling stock such as wheels and axles despite sustained demand from the railways.

To cut some of this import dependence, the railways recently awarded a procurement order for 1.54 million forged wheels that are manufactured in the country.

Besides this, the government is also looking to revamp the existing infrastructure.

Earlier this month, Prime Minister Narendra Modi laid the foundation stone for the redevelopment of 508 railway stations across the country.

With so many developments and long-term tailwinds, the sector has the potential to deliver handsome returns to investors.

Here are five stocks that could be a hot investment.

#1 IRFC

First on our list is 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 21% YoY in the last five years while its net profit has grown at a CAGR of 25% YoY.

Its RoE is healthy at 14.7% while RoCE stands at 5.3 as of March 2022.

For the June 2023 quarter, the company's revenue from operations rose 18.7% YoY. However, it reported a 6.3% YoY decline in net profit.

IRFC is exploring business opportunities such as leasing of rolling stock to entities other than Indian Railways, funding of railway infrastructure being developed through various state JVs, upcoming dedicated freight corridors, multi-modal logistic paths, and renewable energy required for the railway network.

The company is setting up infrastructure for lending to other commercial projects outside of the Indian railways and has given in principle sanction to one Haryana Orbital project and NTPC for leasing of rolling stock.

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.

#2 IRCON International

Second on our list is IRCON International.

IRCON International is a railway construction company. It's a sectoral leader in transportation infrastructure among the public sector construction companies in India. It specialises in railway projects on a turnkey basis.

It caters to both, domestic as well as international markets and receives orders on a tender basis. Earlier, the company used to be nominated by the MoR for various railway projects, which shifted to a competitive bidding basis in FY21.

IRCON's revenue has grown at a CAGR (compounded annual growth rate) of 21% in the last five years while its net profit has grown at a CAGR of 14%. The company's return ratios are also comfortable with RoE at 15.5% and RoCE at 15.8%.

Its debt-to-equity ratio also stands low at 0.3x.

For the June 2023 quarter, IRCON reported a 36% YoY increase in revenue. Net profit surged 30% YoY to Rs 1.9 bn.

Going forward, the company plans to enhance its portfolio with projects in the international markets to achieve healthy profit margins offered by these projects.

It is also exploring new emerging areas for business diversification. As part of its diversification strategy, the company has entered the renewable power sector to establish a 500 MWH solar power plant with a joint venture partner.

The company's goal is to move ahead from being a construction company to a diversified company having a portfolio of BOT, DBFOT, EPC, and other contracts as well as project development and operation through subsidiaries and JVs.

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

#3 Rail Vikas Nigam

Third on our list is Rail Vikas Nigam.

Rail Vikas Nigam was incorporated in 2003 by the Government of India. It is engaged in the business of implementing various types of Rail infrastructure projects assigned by Ministry of Railways.

In the last five years, the company's revenue has grown at a CAGR of 22%, driven by a healthy scale of operations. The net profit also grew by a CAGR of 20% during the same time.

Its RoE and RoCE stand at 20.7% and 17.8%, respectively. The company's debt to equity ratio stands at 0.9x which is under 1.

For the June 2023 quarter, the company's revenue rose 20% with a 15% jump in its net profit.

Currently, RVNL has a strong order book of over Rs 650 bn, focusing on railway, metro, and overseas projects.

The company is confident in its ability to execute projects and maintain positive growth, targeting an order book of Rs. 750 bn to Rs 1 tn.

RVNL is actively participating in railway tendering opportunities and has won bids worth over Rs. 300 bn.

During the financial year 2023, it entered overseas markets and signed an MoU with Kyrgyzstan for an order worth approximately Rs 180 bn. It is planning to expand its overseas presence and take up projects in several other countries.

RVNL has also received an order of 120 trains for the Vande Bharat project from the government of India. It is also actively bidding for several rail and metro rail projects in India.

RVNL listed in 2019 and the company's shares have seen a massive rally since then, rising over 500%. This was on the back of improved prospects.

#4 RITES

Last on our list is RITES.

The company is a leading player in India's transport consultancy and engineering sector. The company offers consulting for railways, airports, highways, and ports in India and abroad.

It also offers services such as third-party inspection, quality assurance, project management, export of rolling stock and modernisation of railway workshop projects.

How do the company's financials fare?

RITES' revenue has grown at a CAGR of 12% in the last five years while net profit has grown at 10%.

The company's margin in the segments that it operates reflects in its numbers. Margins of the company have been averaged at over 25% in the last five years.

This has translated into healthy return ratios as well. The company's RoE and RoCE stand at 22.4% and 30.5% respectively.

It also has no debt on its books.

For the June 2023 quarter, the company reported a 10% dip in revenue with a 26% fall in net profit.

Going ahead, the company aspires for double-digit growth in the bottom line. It is seeing growth in its non-Indian Railway clients in the QA sector.

RITES is not planning to diversify into construction and will continue to focus on consultancy, with a new vertical in sustainability. The consultancy order book is at a total of Rs 27 bn, with growth in international revenue at about 50%.

With respect to the export business, RITES is aggressively targeting new countries with different gauges of railways for their export business, with a focus on cape gauge orders.

The revenue from export orders is expected to spill over to FY25. The company expects a steady basis revenue of about Rs 4-5 bn on an annual basis from export of rolling stock.

#5 Railtel Corporation of India

Last 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 20% CAGR over the last three years. It has strong return ratios with RoE at 11.9% and RoCE at 16.8% of March 2023.

It also enjoys a debt free balance sheet.

For the June 2023 quarter, the company reported a 24.1% YoY increase in revenue. Net profit rose 48.5% YoY as other income rose and tax expenses fell.

Shares of the company recently hit their 52-week high after the company's chairman and managing director, Sanjai Kumar, said that the company was eyeing Rs 40-50 bn worth of orders related to LTE and Kavach from the railway ministry.

Last week, the company received an order from Kerala State Information Technology Infrastructure for the supply, installation, testing, commissioning, and maintenance of ISP Hardware, Software and License for Kerala Fibre Optic Network (KFON) amounting to Rs 279 m.

RailTel has also received the work order from Pimpri Chinchwad Smart City Limited (PCSCL) for providing end to end services for monetisation of PCSCL City Network Infrastructure on a revenue sharing basis.

The estimated annual revenue is Rs 700 m and total revenue for 10 years is Rs 7 bn, the company said.

Currently, the company is maintaining a robust and sustainable orderbook of Rs 48 bn across multiple sectors such as railways, IT, defense, health, mining, coal, banking, smart cities, insurance and more.

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 rise 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...