Recent initiatives as well as the fare hike (the first time in the last 10 years) have ignited hopes of better days for the Indian Railways. This should also translate into opportunities for some of the companies catering to the railways sector, triggering a re-rating of their stocks.
Estimates suggests that the fare hikes will enable railways to mop up additional Rs 6,600 crore annually. This sent a strong signal to the markets considering that a gradual fare hike will mean better cash flows and higher capex in the railways, which has seen under investments due to lack of funds in the past. That apart, the news pertaining to dedicated Delhi-Mumbai freight corridor gaining traction is positive. Given that it requires investment worth about Rs 96,000 crore, it should lead to higher growth opportunities for railway equipment makers.
"Till last year, the railway procurements were low. But, with the change at top level in the railway ministry and the need to revive Indian Railways, things are improving. We expect the orders from the railways to improve in the coming days," says Sunil Jain, head of research, Nirmal Bang Securities. Put together, there are potential gains for most railway equipment companies. But, analysts are more bullish on Titagarh Wagons and Texmaco Rail, even as they see growth opportunities for companies like Kalindee Rail Nirman and Stone India.
Wagon of opportunities
The railways had earlier lowered their procurement target of wagons or FY13 to 13,000 as against 18,000 in FY12. However, analysts are now expecting the procurements to rise in the coming years. The Indian Railways Vision 2020 suggests that there will be a need for 289,136 new wagons, which will be required to be procured by 2020. This, analysts believe will translate into procurement of more than 30,000 wagons annually from FY13 onwards, and that provides good visibility. Additionally, there are opportunities in the form of replacing existing wagons besides strong demand from metro railways and mass transport networks in the urban areas.
In the wagons space, Titagarh Wagons and Texmaco Rail are the biggest players in India and are expected to be key beneficiaries of the emerging opportunities. Titagarh Wagons has an order book of about 3,000 wagons and is more diversified in terms of private and public sector clients. "Titagarh is a good pick given its positioning and the attractive valuations. The share price is not truly reflecting the strength of its core business. It is demerging its coach business which should create more value. Additionally, it has holding in a French company, which is doing well. It also has stake in Cimmco, which is a listed company in India. These things put together make it an attractive investment," says Jain.
Further, the capex in the corporate sector could also prove to be good for railway equipment companies, especially for Titagarh which is focusing on the private sector clients. Recently, Coal India said that it plans to spend additional Rs 14,500 crore towards development of its rail infrastructure. Further, there are huge investments taking place in the port sector and connectivity of the same will require large investments in the rail infrastructure. Earlier, the railways had said that they expect investments of about Rs 3,800 crore coming from the private sector for six port connectivity projects.
This should also prove beneficial for wagon maker, Texmaco, which also has strong visibility with an order book of about 5,000 wagons. Additionally, the company is also looking to participate in dedicated freight corridor project and working with the Japanese consortium. "Texmaco's order book may receive further fillip with start of UGL Australia joint venture (JV) operations from November 2012 and wagon leasing JV with Touax, France," says Chetan Kapoor, who tracks the company at IDBI Capital.
Analysts also believe that the benefits could come to companies like Kalindee Rail, which provides services for the project relating to railway track, signalling and telecommunication. Similarly, Stone India, too, could emerge as a major beneficiary. The company deals in different kinds of brake systems used for carriage and freight, diesel locomotive and electric locomotives. The key risk being the pace of implementation of projects by the public sector giant, which is inherent to the business.
