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As it turns out, first quarter earnings growth has been mixed. (Mint)
As it turns out, first quarter earnings growth has been mixed. (Mint)

Railway-linked infrastructure stocks struggling to stay on track

  • For these railway-focused stocks, much depends on actual execution
  • Railway capex has in the recent past lagged estimates

For railway-linked infrastructure stocks, it has been a grind much like the commute in some of India’s crowded trains.

Shares of Rites Ltd fell 10% from their highs in early July, while others such as Rail Vikas Nigam Ltd (RVNL) and Ircon International Ltd declined as much as 16.6% and 19.6%, respectively, from end-May levels.

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Initially, there was a fair bit of excitement about these stocks, on hopes that capital outlay for Indian Railways will grow in the coming years. It is a segment that analysts say is as important as roads, with the government planning 8.5 trillion in capital expenditure over five years until FY20.

Additionally, two dedicated freight corridors, where about 60% of construction has been completed, are expected to be operational by 2021. The railways has also been electrifying its tracks, and about 51% of its network is now electrified.

Railway lines are also being constructed more rapidly than in the past, inching up to 11.2km a day at present, according to analysts.

“The Indian Railways aim to complete 4,100km, including 1,000km of gauge conversion and 2,100km of doubling of lines. The rate of construction in FY16 was 7.75km a day; in FY17, 7.82km and, in FY18, 5.10km," said analysts at Antique Stock Broking Ltd in a client note.

In the recent past, order flows to railways-focused companies have been rising as new tenders have been floated. This explains why some railway-linked infrastructure stocks have been swelling order books. Ircon’s order book is about six times FY19 revenue, while RVNL’s order book is about seven times.

While all this sounds fine for these stocks, much depends on actual execution. Indian Railways is faced with many of the same issues as road-building companies such as land acquisition and right of way, which means there could be delay in project execution. Besides, railway capex has in the recent past often lagged estimates.

As it turns out, first quarter earnings growth has been mixed. Rites and RVNL have reported improved earnings in the past year, while Ircon reported lower earnings.

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