IRCON, RVNL: Disconnect between fundamentals, valuations of railway stocks

The sharp rally in the railway-related stocks thus far in fiscal 2025-26 (FY26) has been on account of an overall uptick in the stocks of mid-and small-caps and lacks fundamental support, argues a recent report by Kotak Institutional Equities, and warns of a 'large disconnect' between the fundamentals and the valuations of railway stocks.
'We see a large disconnect between the fundamentals and valuations of the railway companies. PSU railway stocks trade at several times book value (net worth) and at very rich price-earnings (P/E) multiples. The valuations are very hard to reconcile with the financials and growth prospects of the companies,' wrote Sanjeev Prasad, managing director & co-head at Kotak Institutional Equities in a recent coauthored note with Anindya Bhowmik and Sunita Baldawa.
Cash and investments, the note said, accounted for 25 per cent of the book value at end-FY25 and other income accounted for 12 per cent of the pre-tax profits of the railway stocks in FY25. DETAILED VALUATION GRAPHIC HERE
Thus far in FY26, most railway-related stocks have seen a sharp rally, with Railtel Corporation of India surging nearly 47 per cent during this period. Ircon International, Rites Ltd., Texmaco Rail, Rail Vikas Nigam (RVNL), Titagarh Rail Systems and Indian Railway Finance Corporation (IRFC) moved up 17 per cent to 40 per cent, ACE Equity data shows.
In comparison, the Nifty 50 index has gained 6.3 per cent, while the Nifty CPSE index has moved up 6.7 per cent during this period, data shows. Midcap mania
Rally in the railway stocks, the Kotak note said, is attributed to the general excitement and euphoria in the small-and midcap (SMID) stocks, which has resulted in several narratives across sectors that are dominated by SMID stocks.
Market capitalization (market-cap) of the 7 railway stocks (IRFC, RailTel, IRCON, RITE, Jupiter Wagons, Titagarh Wagons and RVNL) studied by Kotak stood at Rs 3.6 trillion as on June 5 versus book value of Rs 784 billion and net profit of Rs 99 billion in FY25.
"The market is clearly not making any distinction across sectors and stocks, as long as they fit into some prevailing narrative (defense, electrification, manufacturing, railways). Many of the 'narrative' stocks are largely owned by retail shareholders, which may partly explain the periodic bouts of extreme volatility in the stocks," Prasad wrote.
Capex plans
Going ahead, Kotak does not see a meaningful pick-up in railway capex, which could bolster the earnings of related companies and justify the steep premium they command at the bourses.
Indian Railways, Prasad feels, may have largely maximized the capacity of its extant railway network with large investments in rolling stock and track over the past 10 years. Moreover, he feels there is low visibility on new projects such as a high-speed railway network on the lines of dedicated freight corridors or the upcoming Ahmedabad-Mumbai high-speed line.
The outlay for railway capex stood at Rs 2,426 billion in FY24, Rs 2,519 billion in FY25 revised estimates (RE) and Rs 2,520 billion in FY26 budget estimates (BE), the Kotak note said.
"The bulk of the capex of the railway sector is captured in the central government budget, with only a portion of capex pertaining to metro projects captured under a different head of government spending. Even spending on metro has not seen a meaningful pickup," the note said.

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