Rail stocks take flight on business prospects, but profitability remains a concern
Poor financial performance notwithstanding, investors in shares of wagon manufacturers continue to ride on hopes of an imminent turnaround. Stocks of Texmaco Rail and Engineering Ltd and Titagarh Wagons Ltd gained about 25% each after their September quarter results even as their performances provided no clear signs of an earnings recovery. In fact, Texmaco reported a loss and Titagarh’s profits dropped from the year-ago quarter in Q2, continuing the subdued show of the June quarter.
The latest surge in share prices are triggered by hopes of a release of a large order for wagons by Indian Railways. “With the expected finalization of the Railway tender for 9,500 wagons shortly, the order book position of wagon division is expected to improve,” Texmaco said in a post-September results note.
Titagarh hopes to capture 20-25% of the tender, the management told CNBC-TV18. According to the management, the railways is looking to enhance wagon order intake. Further, wagon purchases related to the freight corridor are expected to be planned in 2018, providing business visibility.
Adding to the optimism is the data and commentary from the rail ministry indicating traction in awarding contracts for works such as electrification and track renewals. According to Elara Securities (India) Pvt. Ltd, contracts for electrification of rail lines rose sharply in the first half of the current fiscal year. Given that the paucity of wagon orders was largely responsible for the weak financial performance of these companies in recent quarters, the commentary provided respite for investors.
But as has been the case in the past, investors may well be counting their chickens before they are hatched. Wagon purchases by Indian Railways are plagued by delays, intense competition and pricing pressures. So much so that some participating firms even found the awarded contracts to be unremunerative in the past. “The margins have been under pressure and may continue as such in short term due to excess capacity in the wagon industry and poor demand from the Railways,” Texmaco said in its FY17 annual report. This makes pricing an important factor in railway tenders.
That said, investors can take heart from the risk mitigation or the diversification efforts of these companies. Texmaco is trying to straddle the full spectrum of railway business such as rolling stock; engineering, procurement and construction; electrification, among others. The company claims it is now better placed to capture contracts from the national carrier’s spending on infrastructure. Titagarh now derives a significant part of its revenues from overseas and non-railway businesses. Encouragingly, the company says it is seeing positive momentum in demand from the private sector.
With wagon orders from the railways now showing signs of a revival, a sustained improvement in other businesses can help the earnings of Texmaco and Titagarh rebound. While high expectations are driving investors to these stocks, it is crucial the next quarterly results reflect signs of an earnings recovery.
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