Indian Railways-related stocks are on fire again. In the past three-four weeks, shares of Texmaco Rail and Engineering, Kalindee Rail Nirman (Engineers), Container Corporation of India, Kernex Microsystems and BEML have gone up by 10-30 per cent as the date for the rail budget draws near. It remains to be seen whether the bullishness stays in the counter, or fizzles out like just about every year when investors start booking profits after the rail budget.

Reality check

Before delving to stock-specific movements, let us look at the health of the Indian Railways. The Indian Railways has generated Rs 49,209.21 crore of revenue earnings from commodity-wise freight traffic during April-December 2011 compared with Rs 44,789.41 crore during the corresponding period in the past year, registering a mere increase of 4.59 per cent.

Indian Railways carried 704.81 million tonnes of commodity-wise freight traffic during April-December 2011compared with 673.31 million tonnes carried during the corresponding period in the past year, registering an increase of 4.68 per cent.

Over the past few years, except on a rare occasion or two, Indian Railways-related stocks have shown extreme bullishness from the start of the year till the rail budget, which is presented in the last week of February.

On fire

Government-run BEML, which manufactures rail coaches, is up 11.3 per cent over the past one month. The movement in Kernex Microsystems is even bigger. Kernex, which is engaged in the business of manufacturing, installing and maintaining of anti-collision systems as well as conceptualising, designing, and developing certain railway safety and signal systems for Konkan Railways Corporation, has seen no less than 30 per cent jump in its stock price over the past 30 days.

Kalindee Rail Nirman (Engineers) and Texmaco Rail Engineering are up 15 per cent each, while notably, Titagarh Wagons and Gateway Distriparks are up just 5 per cent each.

There are some new players also that could have exposure to Indian Railways. For example, Commercial Engineers and Body Builders (Cebbco), according to Anupam Gupta and Sorabh Talwar of HDFC Institutional Research, is now ramping up its railway business, which management estimates, has higher margins than truck-body building.

Cebbco, which refurbishes wagons and also manufacture them, is setting up a new plant in Jabalpur to strengthen its bidding capabilities for its Indian Railways business.

“With the start of the New Year, railway stocks are abuzz with activity, where the stocks related to the sector such as Texmaco Rail, Kalindee and Titagarh Wagons, to name a few, are in the limelight. Over the past few days, we have seen a smart upmove in these counters. Within a month or so, these stocks have given returns of anywhere between 10-20 per cent. This is on the back of anticipation of measures likely to be announced in the rail budget. The stocks have also been partially driven by the sentiment related to the event,” said Dewang Sanghavi, analyst, ICICIdirect.

Trend analysis

First, let us find out why some stocks like Titagarh Wagons don’t mirror investor optimism that is seen in others. Experts and industry observers point out that delays in Indian Railways wagon orders have been a regular feature. For FY12 too, wagon orders have seen considerable delays, which experts believe is likely to be detrimental to growth outlook.

The wagon ordering process is typically initiated in April. Nearly 75 per cent of total yearly acquisition allocations are completed by September-October. This year, officials believe, the ordering process is likely to be delayed further based on industry interactions.

So, the large bureaucratic setup, which requires clearance from a number of departments for orders, could prove to be a hindrance. According to a December 2011 report by IDBI Capital, wagon orders have historically been delayed from three months to more than a year.

“For FY12, the orders have already been delayed by two months from the normal allocation cycle. Though, we believe that a replay of a FY10-like scenario is less likely because the delays are not because of the tender getting referred to the legal cell as was the case earlier. Hence, we expect orders to be released in Q4FY12, but, since execution scale-up requires a month, we expect the earnings impact to be clearly visible in FY12E itself,” the report said.

Other experts point out that slowly but surely, some large players are becoming immune to railway orders. They point towards Texmaco Rail and Engineering, the largest of all wagon manufacturers. It is at present, estimated to have an orderbook of 2,000 wagons, mainly from non-Indian Railways.

The Indian Railways wagon orderbook in FY11 is understood to be already exhausted. There is a growing feeling among some experts that the earnings before interest, taxes, depreciation and amortisation (Ebitda) margins for Texmaco are expected to be subdued due to the higher non-Indian Railways share in wagons delivery, which typically lead to lower margins.

There are some Indian Railways-related stocks that are linked to freight rates. Last year, as these rates remained constant, Container Corporation was largely unaffected.

But, this year, with the government’s fiscal situation being tighter, Container Corporation has gained almost 16 per cent over the past 30 days due to expectations of a rate hike.

In case of Kalindee Rail Nirman (Engineers), there seems to be a rub-off effect from the government’s plan to meet financial targets. Chetan Kapoor, an analyst with IDBI Capital, said in a January 25 note, “There has been an increased emphasis from Indian Railways to achieve targets lately. We expect a positive rub-off on Kalindee due to the improvement in project execution initiatives by Indian Railways over the coming quarters.” The company in the recent December quarter recorded better-than-expected results with 127 per cent year-on-year growth in revenue at Rs 81.7 crore and profit after tax (PAT) up 70.8 per cent year-on-year.

As investors look forward to the rail budget, further indications of land allocation to dedicated freight corridor will be beneficial for private operators and container depots. The street is also expected to keep an eye on India Railways budgeted procurement, while any increase in plan outlay may benefit companies, including Kernex Microsystems, BEML, Kalindee Rail, ARSS Infra and Hind Rectifier.

kumarsroy@mydigitalfc.com

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Analyst outlook

DK Aggarwal, CMD at SMC Investments and Advisors

Stocks in the railway segment, such as Titagarh Wagons and Kalindee Rail, among others, come on the radar of the market every year before the railway budget in anticipation of some benefits, new orders and projects announced by the railways department.

The full-year business of these companies will be dependent on almost entirely on the new announcements made in the railway budget, and, hence, this event becomes very significant for these companies. However, what investors shall remember is that, as these stocks tend to move by about 25-30 per cent during January and February of every year, it would be prudent to book profits close to the date of the budget because these stocks tend to get sold off just after the budget. Again, these stocks will come on the radar of the market only at the time of next year’s railway budget. Hence, the investors shall focus on the timing of entry and exit in these stocks to book optimal profits.

In addition, the announcements that shall be kept in mind and the stocks, which will have an impact, are as follows:

The announcement regarding “freight rates” will impact the stocks such as Concor or Gateway Distriparks. So, this should be watched closely.

Further, the announcement regarding land allocation to dedicated freight corridor will be beneficial for private operators and container depots like Concor and Gateway Distriparks. Hence, this shall be one more area of focus.

The announcement regarding the procurement of railway wagons as budgeted in the railway budget will have impact on the companies like Texmaco and Titagarh Wagons. Higher the size of procurement of railway wagons, the higher the benefit for these companies.

We expect the increase in total plan outlay in the railway budget will benefit companies like - L&T, Kernex Microsystem ,BEML, Kalindee Rail, ARSS Infra and Hind Rectifier.

In addition, one more aspect that will attract market attention would be the announcement by the railways department regarding their plan of issue of “infrastructure bonds”. The market will be watching the size of the infrastructure bond issue as announced by the railways department.