Mumbai: Traders who look to make a quick buck on railway stocks ahead of the budget may have a reason to stop doing so. An analysis of rail budgets since the turn of the millennium has shown that a run-up in railway stocks ahead of the budget has seldom been sustainable. In fact, it has almost invariably resulted in a sharp fall afterwards.

Railway stocks have shown a run-up over the month before the budget on 10 out of the previous 19 budgets since 2000 (median positive returns of 7.33%). Returns have been negative in the one month after the budget in all but one year. Median returns one month after the budget in such cases is -19.29%.

This analysis considered stocks whose business caters to the Indian railways such as Texmaco Rail and Engineering, Kalindee Rail Nirman (Engineers), Stone India, Cimmco, Simplex Castings, Container Corporation of India, Hind Rectifiers, Titagarh Wagons, Kernex Microsystems (India) and Transformers and Rectifiers (India).

The result is the same if one considers returns relative to the Sensex as well. Railway stocks have underperformed in the one month after railway budgets on a majority of occasions in which they outperformed the bellwether ahead of the railway budget (six out of eight times since 2000).

The one-month median return for railway stocks this year is -8.89% as of 23 February. This is more than twice the -4.39% fall for the Sensex in the same period, suggesting that market players aren’t betting on Prabhu breaking the jinx.

Stocks tend to run up because of expectations of long-overdue policy corrections, suggest brokerage reports. A JM Financial Institutional Securities note dated 13 October said that Indian Railways has gotten into a vicious cycle of underinvestment, poor service and financial underperformance.

“The low fares (particularly in the passenger segment) have directly resulted in minimal surplus generation, thereby making investments difficult and leading to the poor financial health of IR," said the report. It added that railways may still emerge as an engine of growth in capital investments over the next 10 years.

The biggest problem, as Chart 2 shows, is that actual investments seldom match up to budgeted promises.

“…the historical lack of delivery in the railways creates skepticism, but this time could be different," said a Morgan Stanley report. Indeed, April-December numbers show that the railways ministry spend jumped 32% from a year ago, the highest among major departments barring roads and power.

Railway minister Suresh Prabhu has announced plans to spend $132 billion on railways in the next five years. Thursday’s budget will show if it is more of the same or whether there is a concrete time-bound plan for fund raising—with measures such as selling non-core assets and hiking fares—and spending.