Shares of Rail Vikas Nigam Ltd (RVNL) have climbed more than 6% over the past two trading sessions to ₹368, spurred by the second revision in railway passenger fares since July, which took effect on 26 December. Two fare hikes within a year signal a clear intent by the government to strengthen Indian Railways’ finances, potentially creating headroom for higher capital expenditure (capex) over time.
While such policy moves are sentimentally positive, the stock’s reaction appears out of proportion to the expected incremental financial impact on the revenues of railways. RVNL’s market capitalization has expanded by roughly ₹4,000 crore in just two days. For perspective, the annual revenue gain for Indian Railways from the cumulative effect of the two fare hikes is also estimated at about ₹4,000 crore.
However, the entire amount may not be available for capex, as a portion of it could be used to meet rising manpower costs and pension liabilities. Moreover, RVNL is only one of several beneficiaries of railway capex. Even if it secures a large share, capex spending translates into revenue, not profit, for the company, especially given the thin Ebitda margins of 5-6% typical of railway orders.
It is possible that some of the frenzy in the RVNL stock may also be driven by budget-related expectations of large capex announcements. Such rallies, however, tend to favour short-term traders. For long-term investors, the fundamentals remain unchanged unless higher spending meaningfully flows through to financial performance.
On that count, RVNL's track record has been underwhelming. Between FY22 and FY25, revenue grew at a meagre 1% CAGR to ₹19,923 crore, whereas Ebitda slipped at 2% CAGR to ₹1,125 crore. Ebitda margin has eroded from 6.1% in FY22 to 5.6% in FY25 due to the less profitable competitively bid projects getting executed vis-à-vis higher share of nominated orders in the past. Here, nominated orders refer to orders received from railways by virtue of being a public sector company dedicated to laying new railway lines, gauge conversion, and so on.
The weakness persisted in the first half of FY26. Revenue for the six months ended September was largely flat year-on-year at ₹9,032 crore, while Ebitda plunged 40% to ₹270 crore, dragging margins down 210 basis points to 3%. Adjusting for ₹60 crore of BharatNet-related expenses in the June quarter, the Ebitda margin would have been 3.6%. Whether management’s initiatives, such as design standardization and more selective bidding, can arrest the margin erosion remains to be seen.
Despite the muted first half, RVNL has retained its FY26 revenue growth guidance of at least 5% year-on-year, targeting around ₹21,000 crore, on expectations of an execution ramp-up in the second half. Historically, H2 has been stronger than H1. If execution improves as planned, full-year Ebitda margins could recover to 6.5-7%.
The order book, at around ₹90,000 crore as of September-end, offers strong revenue visibility for the next three years. Margin dilutive competitively bid contracts account for 52% of the current order book.
Despite IDBI Capital Markets & Securities factoring in healthy order book-led revenue growth and improved margins through corrective measures, RVNL’s valuation based on the brokerage’s estimates for FY27 appears rich. The stock trades at a hefty price-to-earnings multiple of 40x. This represents a significant premium to the 22x-28x multiples that brokerages such as Motilal Oswal Financial Services and PL Capital assign to the core EPC business of Larsen & Toubro Ltd.