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Business Standard
09-06-2025
- Business
- Business Standard
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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Business Standard
16-05-2025
- Business
- Business Standard
Banks, defence, OMCs: Which PSU stock to buy now? Analysts pick top bets
PSU stocks to buy: Once Street's favourite, shares of public sector undertakings (PSUs) have not yielded much returns to investors so far this year. Excluding the recent rally in defence shares, only a handful PSU stocks have outperformed the benchmark Nifty50 index during the period. So far in calendar year 2025 (till May 14), the Nifty CPSE index has risen 4.14 per cent, in-line with the Nifty50 index's gain of 4.3 per cent, ACE Equity data shows. By comparison, the Nifty CPSE index climbed 25.25 per cent in CY 2024 and 73.7 per cent in CY 2023 as against the benchmark's rally of 8.8 per cent and 20.2 per cent in the respective years. The trend, analysts believe, may not change much in the coming months and investors should cherry-pick PSU stocks based on valuation comfort along with earnings growth visibility and policy support. "The universe of PSU stocks is huge and diverse. Investors should bet on specific sectors and stocks from the basket as most of them may continue to consolidate after years of outperformance," said Kranthi Bathini, director of equities at WealthMills Securities. Among individual stocks, Bharat Dynamics, Mazagon Dock Shipbuilders, Garden Reach Shipbuilders, Bharat Electronics, Mishra Dhatu Nigam, Hindustan Aeronautics, and Cochin Shipyard from the defence pack have surged between 10.4 per cent and 59.3 per cent this year. While the rally in defence-related PSU counters was on the back of India - Pakistan geopolitical conflict, shipbuilding stocks found favour amid the government's strong focus on improving India's maritime infrastructure and indigenisation push. Outside these baskets, only NBCC (India), Steel Authority of India (SAIL), Bharat Petroleum Corporation of India (BPCL), Indian Oil Corporation, NMDC, and MOIL have outperformed the benchmarks by rising up to 15 per cent during the period. Among stocks, outside of the CPSE basket, PSU banks like Union Bank of India, Bank of India, Indian Bank, and Canara Bank outran the Nifty50 index by rallying in the range of 5.5 per cent to 12 per cent. "PSU stocks are affected a lot by the government policies as the ownership and regulatory control rest with them. Investors should, thus, invest in companies which are, relatively, stable from a policy viewpoint, are non-cyclical in nature, and have high dividend yields," said Deepak Jasani, a stock market veteran. High dividend yield, he added, provides a margin of safety against any decline in stock prices. PSU stocks to buy From an investment perspective, analysts say investors interested in the PSU space could look at opportunities across sectors driven by strong policy support, infrastructure momentum, and improving fundamentals. Industries such as oil and gas, and metals, which are cyclical in nature, may be avoided as cycles are difficult to predict and impacted by macro variables, they advise. "While we have a 'neutral' view on the PSU sector, investors willing to invest in PSU stocks can look at the renewable energy and/or transmission infrastructure sector amid the government's policy push. Defence companies, too, may remain in focus as exports are expected to surge to ₹50,000 crore by fiscal year 2029-30 (FY30) with indigenous production ramping up from ₹1.6 trillion to ₹3 trillion," said Anil Rego, founder and fund manager at Right Horizons PMS. Deepak Jasani, meanwhile, backs PSU stocks from the metal, oil refining, banking space on the back of their dividend yielding potential. "PSU banks are the safest sector to be in. That apart, oil refining companies, and energy-linked companies like Gail (India) and Coal India, which are insulated from global developments, can be a good bet," he said. Echoing similar views, Kranthi Bathini of WealthMills Securities said selective outperformance could be seen in PSU banks, defence, and OMC stocks going ahead.
