Budget 2023: Why investors should keep an eye on railway stocks ahead of Union Budget

Budget 2023: This year's Union Budget will be presented by Union Finance Minister Nirmala Sitharaman in the Parliament on February 1, 2023. Many expectations are aligned with the Budget 2023, and certain sectors are in focus as they are expected to get significant allocations. One such sector is railway.

According to Vinit Bolinjkar, Head of Research, Ventura Securities, with the increasing demand for railway logistics to transport goods, Indian Railways has been spending more on dedicated freight corridors and will upgrade the logistics infrastructure in the coming years.

Anand Varadarajan, Director, Asit C Mehta Financial Services Ltd shared similar views and said, “At present, around 75 per cent of the revenue for railways comes from freight. Also, during the current financial year the importance of efficient freight transportation has increased due to the rising crude prices which has affected the goods transportation cost and thereby inflation.”

Budget 2023 Railways sector: Expected allocation and its use 

According to experts the government budget allocation in the railway sector could range from 1.6 lakh crore to 2.0 lakh crore.

“Higher capital expenditure allocations will be used for electrification, gauge conversion, redevelopment of stations," said Anand Varadarajan.

According to Vikas Gupta, CEO and Chief Investment Strategist, OmniScience Capital, the focus on increasing the share of railways in freight will get sharper as the National Rail Plan 2030 has a target of 45 per cent market share in freight by 2030.

Bolinjkar believes that allocation will be significantly used for new Vande Bharat trains on major routes and new track construction.         

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Budget 2023: Impact on Railway stocks

According to Gupta, railway companies are highly profitable companies with true cash adjusted Return on Capital (ROC) ranging from 15 per cent to 30 per cent and the actual budget allocations are likely to surprise the markets and give a boost to these stocks.

According to Bolinjkar, new track construction, telecom connectivity and wagon sourcing will help different stocks. 

1. Track electrification is expected to generate a significant order book of more than Rs 10,000 crore for these EPC companies —

- KEC International 

- Kalpataru Power Transmission

2. New track construction will bring the order book close to Rs 50,000 crore for railway Public Sector Undertakings (PSUs) such as —

- RVNL 

- IRCON International 

- Rites

3. Telecom connectivity on new routes is likely to generate new orders for RailTel Corp. 

4. New track construction will also bring orders for new trains in both freight and passenger verticals, which will significantly boost demand for locomotives and coaches and following may benefit —

- Titagarh Wagons 

- Texmaco Rail 

- Jupiter Wagons

Budget 2023: Expert call on Railway stock 

SAMCO Securities believes that railway stocks will consolidate and trade in range until the Union Budget, since most of the good news is already priced in. It advises 'wait and watch' tactics and to take cues from the allocations and announcements done in the Union Budget to Railways.

Ventura Securities recommends buying the following stocks as they can benefit from the allocation: 

- KEC International (FY25 EV/EBITDA of 8.1X), 

- Kalpataru Power Transmission (FY25 EV/EBITDA of 5.9X)

- RVNL (FY24 EV/EBITDA of 11.7X)

- Ircon International (FY25 EV/EBITDA of 0.14X)

- Rites (FY25 EV/EBITDA of 7.2X)

- Railtel (FY25 P/E of 12.2X)

- Titagarh Wagons (FY24 EV/EBITDA of 9.2X)

According to Asit C Mehta Financial Services Ltd, there is expectation about divestment in IRCTC by the government and any clarification about this in the budget could be positive for the stock. 

Performance of Railway stocks so far 

According to Apurva Sheth, Head of markets Perspective & Research, SAMCO Securities, railway stocks have seen a tremendous rally between July to November 2022.  The main reasons behind rally in railway stocks are: 

1. Government push on capex – modernising railway stations, new trains etc.

2. Low valuations and high dividend yields

3. Sector rotation from defence

4. Expectations from Railway Budget

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