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Why Railway Stocks are Rising and What Lies Ahead

Nov 29, 2022

Why Railway Stocks are Rising and What Lies Ahead

Indian share markets are roaring at all-time high levels today.

The Midcap and SmallCap indices are catching up with the ongoing bullish momentum.

In the Midcap and SmallCap space, sector specific momentum is where the money is right now.

The public sector units (PSU) are currently the best-performing sector. The rally started with PSU Banks and the fire is spreading to other PSUs.

I recently wrote about why PSU stocks are rising and what lies ahead.

But now...it's time for railway stocks.

Stocks involved in the railway segment have been the talk of the town for the last few weeks.

In the previous month, a few railway stocks witnessed a staggering rally of over 50% while others are still only delivered marginal gains.

Performance of Railway Stocks

Company Name 1M 3M 6M
Indian Railway Catering And Tourism Corporation Ltd. -2% 5% 5%
Indian Railway Finance Corporation Ltd. 50% 57% 58%
Ircon International Ltd. 40% 52% 54%
Rail Vikas Nigam Ltd. 97% 144% 148%
Rites Ltd. 3% 30% 57%
Texmaco Rail & Engineering Ltd. 34% 25% 46%
Titagarh Wagons Ltd. 18% 13% 81%
Performance as of close on 28th November 2022.

Co-head of Research at Equitymaster and my colleague Rahul Shah recently explained why railway stocks are going up.

Here's an excerpt from his editorial...

  • I am sure you are wondering about this sudden interest of Mr. Market in rail stocks. Why have investors taken a fancy to them recently?

    Well, I believe the interest is not without reason.

    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 amongst 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 most of these stocks are already sending out feelers about the good times ahead.

    In my view, another big reason behind the stellar performance of rail stocks were the attractive valuations at the start of their upward journey. They were what we analysts call as low PE stocks.

You can read the entire editorial here.

The top gainers...

In the performance table above, Rail Vilas Nigam (RVNL) leads the table with 97% in one month and 148% in the last six months.

The leader of the sector, Indian Railway Catering and Tourism Corporation (IRCTC) has been quiet in terms of stock price performance.

The question now remains whether the rally will continue in railway stocks?

Unlike other sectorial indices, we don't have Railway Index to analyse the trend and predict its momentum.

So we created the Marketcap Weighted Railway Index (MWRI) to analyse the trend.

Constituents and Weights

Company Name Weights
Indian Railway Catering And Tourism Corporation Ltd. 42%
Indian Railway Finance Corporation Ltd. 33%
Rail Vikas Nigam Ltd. 12%
Rites Ltd. 7%
Ircon International Ltd. 4%
Titagarh Wagons Ltd. 2%
Texmaco Rail & Engineering Ltd. 1%

Considering the marketcap of each stock, the weights are assigned to create the index.

With a marketcap of Rs 580 bn, IRCTC leads the weightage with 42% followed by IRFC with a marketcap of Rs 450 bn, weighing 33%.

Marketcap Weighted Railway Index Daily Chart 1

 

On the daily chart above, the Marketcap Weighted Railway Index (MWRI) is trending bullish since the low of June 2022.

After the death cross in May 2022, the index was trending bearish, in sync with the market sentiments.

With the reversal in the benchmark indices, railway stocks also witnessed a reversal, in sync with broader market.

The golden cross - a bullish crossover of the short-term moving average (50 days) over the long-term moving average (200 days) - is visible on the chart, confirming the reversal.

It highlights the current rally is just the beginning of a new trend in railway stocks.

Marketcap Weighted Railway Index Daily Chart 2

 

With the golden cross bullish pattern, the breakout and the re-test of the consolidation is visible on the chart.

After the rally, between July 2022 to September 2022, the index took a breather and broke out in the start of November.

The breakout, re-test, and resumption in the bullish trend, indicates the bulls have the upper hand.

What does the chart of individual stocks signal?

As Rail Vikas Nigam Ltd (RVNL) leads the performance table, does it still have room to go higher?

Let's analyse the price chart of RVNL.

Rail Vikas Nigam Ltd Weekly Chart

 

The stock broke out of the accumulation zone in the form of a horizontal trendline at Rs 26 and headed to Rs 40.

The re-accumulation phase, from the start of 2021 to November 2022, paid off for patient investors as the stock has delivered multibagger returns.

Bulls are grabbing the opportunity at the breakout as volumes in the lower panel signal participation in the rally.

The higher volume on the breakout is a sign of a bullish scenario.

Indian Railway Finance Corporation Ltd Weekly Chart

 

Indian Railway Finance Corporation Ltd has been an underperformer since its listing in January 2021 at Rs 25-26.

Patient investors who got allotment in the IPO will be happy now as the stock is trading at Rs 34.

The stock broke out of the consolidation as per the Fibonacci Time Cycle theory of 89 weeks.

Such was the case with IRCTC too in June 2021 when it was trading at Rs 400. The stock went to touch a high of Rs 1,273.

Can IRFC repeat the IRCTC rally? Only time will tell.

Rites Ltd Weekly Chart

 

Similar to the RVNL and IRFC, Rites share price broke out of the consolidation zone with higher volumes.

The consolidation of around 30 months and the breakout with volumes is likely to last longer and the rally may prolong towards the higher levels.

Ircon International Ltd Weekly Chart

 

This is yet another stock from the basket witnessing a rally, consolidation, and breakout, leading the way northwards.

The uptick in volumes across the railway stocks highlights the eagerness of investors to accumulate these stocks and grab this opportunity.

If you're interested in being part of my charting journey as I share how to create wealth from the profitable trade setups, join my telegram channel - Fast Profits Daily. You'll get access to the best trading ideas in the stock market.

Now Before You Go, This is Something You Need to Know...

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In fact, within defence there are segments with 33x growth potential by 2030. Yes, it’s a massive opportunity.

Tanushree has already identified 3 next-generation defence stocks to ride this mega opportunity.

Now, these are not ordinary defence stocks.

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Our research says that these 3 defence stocks could potentially provide you some of the biggest gains of your lifetime.
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You Can Get Full Details Here...

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...

Brijesh Bhatia

Brijesh Bhatia Research Analyst and expert chartist, is the editor of Alpha Wave Profits. Fully committed to his craft, Brijesh has mastered the art of making money by trading using technical analysis. Brijesh has an MBA from ICFAI and 16 years of experience in India's financial markets. He began his career on Dalal Street as commodities dealer and it wasn't long before he developed his own unique trading system. Brijesh worked on his trading system until it could be expected to deliver 5 units of return for every unit of risk.

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