On a fast track: Rail stocks climbed up to 170% in just 4 months. Here’s why the momentum will sustain

The stocks related to rail transport have been on a roll in the domestic equity market since April 1. Data shows that at least three stocks including Texmaco Rail & Engineering (up 169 per cent), Jupiter Wagons (up 153 per cent) and Titagarh Railsystems (up 149 per cent) have more than doubled investors’ wealth in the current financial year. On the other hand, the benchmark BSE Sensex has gained 11 per cent during the same period. Market watchers believe the ongoing momentum will continue due to robust order book visibility and the government's capex plans.

Commenting on the rally, Santosh Meena, Head of Research at Swastika Investmart, said the sector is currently experiencing a remarkable surge, largely propelled by substantial capital expenditure (capex) investments. Companies operating within this sector are consistently securing significant orders, setting the stage for promising earnings in the future.

“Recent accidents have also highlighted the pressing need for increased investment in the industry, further intensifying the demand for infrastructure improvements and safety enhancements,” he said.

Other stocks including Indian Railway Finance Corporation (up 89 per cent), Rail Vikas Nigam (up 81 per cent), Ircon International (up 78 per cent), Railtel Corporation of India (up 75 per cent), Oriental Rail Infrastructure (up 60 per cent), Texmaco Infrastructure & Holdings (up 59 per cent) and BCPL Railway Infrastructure (up 58 per cent) have also managed to deliver superlative return to investors so far in FY24.

Kranthi Bathini, Equity Strategist, WealthMills Securities said, "Government's capex with respect to improving the infrastructure, introducing the new trains across India, order visibility for at least 2-3 years, focus on increasing goods transportation, modernisation of existing stations and dealing with the shortages of wagons have also pushed railway stocks higher in the recent past."

Meena further added that in response to the rising demand from low-income passengers and migrant workers, Indian Railways is deliberating the expansion of non-AC general-category trains between major cities. This strategic move aims to better address the specific needs of these demographics and enhance their travel experience. While traditionally these trains have been primarily operational during the festive season, their increased availability throughout the year could greatly improve accessibility and inclusivity.

Shares of K&R Rail Engineering, Bharat Electronics, Container Corporation of India and Indian Railway Catering and Tourism Corporation (IRCTC) also gained somewhere between 12 per cent and 40 per cent.

Sharing his views on the valuation after the recent surge in share price, Meena said, “It is worth noting that there has been a noticeable surge in railway stock prices, leading to premium valuations compared to their historical averages. Despite this, the overall market capitalisation of railway stocks remains relatively low. As a result, there might be some potential for consolidation or correction, but there still appears to be room for further growth. Notably, IRCTC stands out as a stock that hasn't participated in the recent railway rally. This dynamic creates a favourable risk-reward ratio, and optimistic expectations surround its upcoming financial results.” He further said that IRCTC’s chart pattern reveals a bullish head and shoulders formation. If the stock manages to breach the Rs 680-mark, there is potential for a rally toward Rs 770.

Gaurang Shah, Senior Vice President of Geojit Financial Services, said, “On IRCTC and IRFC, we had ‘subscribe’ recommendations during the IPO. With the kind of changes that the government has put in place along with the railway ministry, there is a possibility for related stocks to perform well depending upon which company will get what orders. But the changes are positive with respect to changes and replacement of coaches, concentration on dedicated trade corridors and of course from semi to high-speed trains operating and connecting the remotest part of India with the railway network that remains positive.”

Bathini believes that the ongoing trend in the railway will continue because of the government’s plans and strong order book visibility. “Investors are advised to buy railway stocks on dips for longer-term perspective,” he said.

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