Experts say shun rail-related stocks, as changes only cosmetic

With the government having decided to subsume the railway budget in the general Union Budget, internalising its revenues and expenditure, analysts believe these changes do not alter the overall aim and outlook of the rail budget, but will only change its format and presentation, says a Business Standard report.

The practice of presenting a separate railway budget was introduced by the British government 92 years ago to focus on India's most important infrastructure network.

Rail related stocks have done well since 26 December 2016 when the market hit a recent low, with counters such as Hind Rectifiers, Timken India, BEML, Kernex Microsystems, Titagarh Wagons, Texmaco Rail and Kalindee Rail gaining 3 per cent to 28 per cent till 27 January. By comparison, the benchmark indices - the S&P BSE Sensex and the Nifty50 - have gained 8 per cent and 9 per cent each respectively during this period.

"We expect the finance minister to increase the capital outlay for the railways sector to Rs145,000 crore, a growth of more than 20 per cent year-on-year. We also expect some increased allocation for government-aided projects like the dedicated freight corridor (DFC), metro projects, clean Ganga projects, etc," says a pre-Budget note from IndiaNivesh Securities.

Given the upcoming assembly elections, analysts do not expect the government to announce new trains as it would violate the model code of conduct. However, they do not rule out a moderate hike in passenger fares, alongside a higher capital outlay to improve the infrastructure and modernise facilities.

"The changes will be cosmetic. There can be a slight hike in passenger fares. The government cannot announce new railway lines or trains given the upcoming state elections. I think such proposals will come in once the elections are over. Cosmetic things that generate revenue for the railways such as increasing the platform ticket rates, fares for local trains - especially the second class fares, etc can see a minor uptick," suggests A K Prabhakar, head of research at IDBI Capital.

Though there could be some steam left in these stocks till the Budget proposals are unveiled, experts say, investors are likely to book profits once the event is over. Moreover, the proposals announced will take time to bear fruit and be visible in the financial performance of the companies with a lag effect.

While the order wins are necessary for these companies, bringing down the working capital cycle and timely execution still remains an impediment. All these things need to improve, and this will not happen in a hurry. Hence, till there is an improvement in the above-mentioned factors, railway stocks are best avoided. However, they do remain a trading bet ahead of the budget, analysts say.

"Most stocks have already rallied and it is a good time to book profits. Typically, these stocks do tend to move up ahead of the rail budget presentation and the rally fizzles out after the event. It is advisable to book profit and stay away from these stocks for now, as most of these announcements will not immediately turn into orders or add to the bottom-line immediately," Prabhakar says.

G Chokkalingam, founder & managing director of Equinomics Research & Advisory, agrees. "These stocks are a trader's delight as they run up ahead of the event and the rally fizzles out once the budget is presented. The business environment for railway-related stocks has not improved much over the years. It is advisable to exit these stocks," he says.