Railway Stocks Surge Ahead of Union Budget on Hopes of Increased Allocation

Railway stocks such as Rail Vikas Nigam (RVNL), Indian Railway Finance Corporation (IRFC), Ircon International, NBCC (India), RailTel Corporation of India, and Texmaco Rail & Engineering are drawing attention ahead of the Union Budget presentation on July 23.

Following the interim budget on February 1, these stocks have seen gains ranging from 11% to 112%. Rail Vikas Nigam led with a 112% increase, followed by IRCON at 44%, RailTel at 37%, Texmaco Rail at 31%, IRFC at 28%, and NBCC at 12%.

In the Interim Budget for FY25, Finance Minister Nirmala Sitharaman allocated ₹2,52,200 crore to the railways as gross budgetary support, with an additional ₹10,000 crore from extra-budgetary resources. The government also announced plans for dedicated tracks for coal and mineral transport, improved port connectivity, and measures to address congestion to enhance efficiency and capacity.

CareEdge Ratings expects a 12-15% increase in budgetary allocation in the Union Budget. Expectations also include the introduction of a hybrid annuity model to improve public-private participation in the railways sector, along with asset monetization efforts.

The railway industry has urged the government to maintain capital expenditure in the upcoming budget, while former officials and experts have stressed the need to focus on safety. Additionally, experts recommend prioritizing energy, mineral, and cement corridors and increasing spending on technology advancements such as rail-road connectivity, IoT, automation, blockchain, cloud computing, AI, and robotics to boost logistics development.

The sector could benefit from faster track construction, investment in high-speed trains, rolling stock, and the completion of dedicated freight corridors. However, challenges include the lack of a regulatory body and limited public-private participation.

The conversion of rail bogies to Vande Bharat standards is expected to significantly increase Vande Bharat train capacity in the medium term. Emphasis on economic rail corridors to achieve first-mile-last-mile connectivity and station redevelopment will likely remain a consistent theme, according to CareEdge.

Raj Vyas, Vice President - Research at Teji Mandi, anticipates an increase in allocation to between ₹2.8-2.95 lakh crore, with expectations for a Kavach Tender for 3,000 km this year. The focus will be on transforming the passenger rail system, including the introduction of approximately 250 Amrit Bharat Trains over the next 5-7 years.

Industry participants have also called for a production-linked incentive (PLI) scheme to boost the production of railway ancillary parts in India.

Ajay Bagga, an independent analyst, recently outlined key expectations for the railways sector in the Union Budget 2024. These include maintaining high capital expenditure, allocating funds for safety through the rapid rollout of the Kavach anti-collision system, launching new Vande Bharat and Amrit Bharat trains, increasing freight wagons and passenger compartments, and significantly funding safer and faster tracks in congested networks.

A recent study showed that India has 800 crore rail trips annually, projected to rise to 1000 crore by 2030.

Meanwhile, the stock market is rife with speculation about potential fiscal measures and their impacts ahead of the Union Budget 2024 presentation on July 23. The railways sector has seen relatively better performance in new project announcements, indicating potential for higher capex allocation in the upcoming Budget. 

Analysts at Reliance Securities note that while pre- and post-election rallies have been strong, key stock indices may experience corrections over the next few months. Significant opportunities are anticipated in roads, airports, seaports, waterways, and logistics.

"The key outperforming sectors such as defense, railways, and EMS are trading at multi-year or all-time high valuations, driven by order inflows and positive sentiment. We expect some time and price correction in these sectors from current levels, as focus may shift to underperforming sectors, which could catch up over the next few months," Reliance Securities analysts said.