Don't chug off to rail-related stocks, say analysts

Railway-related stocks have underperformed the market so far in 2016, with counters such as Hind Rectifiers, Kernex Microsystems, Stone India, and Titagarh Wagonss kidding 16-22 per cent. By comparison, benchmark indices — the S&P BSE Sensex and the Nifty 50  — have lost 10 per cent each during this period.

Also Read: A fortnight before Budget, little recovery in Railways' finances

Read our full coverage on Union Budget 2016

Analysts say the railway budget on Friday assumes significance. It will be looked at for its potential to rejig the investment cycle and bring transformative change to transportation in India.

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“In our talks with companies, most, including Concor, Gateway Distriparks, and Allcargo Logistics, are expecting the finance minister to announce measures for speedy implementation of the dedicated freight corridor, speedy implementation of the ongoing infrastructure projects, and faster rollout of the goods and services tax, which would help the industry to re-align infrastructure and improve it cost structure,” points out a Kotak Securities note.

Also Read: Railways to tap auto and FMCG sectors in big way

Recently, the government approved Rs 11,000 crore worth of capacity increase in the railways through construction of infrastructure for growth in passenger and freight traffic.

Also Read: CCEA gives nod for Rs 10,700 crore railway projects

Though analysts expect the passenger fares to remain unchanged, rollout and expansion of high speed network, building of 200-kmph train coaches indigenously, upgradation of station complexes for comprehensive government services, skill development and implementation of new design coaches and vacuum toilets are some of the other expectations from the Railway Budget 2016, according to reports.

Given the underperformance of railway-related stocks, should you invest in these stocks ahead of the railway budget?

Experts say that while there could be some upmove till the railway budget proposals are unveiled, investors are likely to book profit once the event is over.

“I don’t expect the rally to sustain. On the contrary, I’m bullish on defence-related stocks. Anything related to railways, such as Titagarh Wagons, Kalindee Rail, Siemens, ABB etc, will rally for now, but the upmove is not sustainable. Whatever be the Budget proposals, these companies will not get orders immediately. The overall market sentiment remains negative and even a small rally is being sold into. The rally in railway stocks is a classic case of ‘buy on rumour and sell on news’,” says A K Prabhakar, head of research at IDBI Capital.

“For a lot of railway-related companies, order execution still remains a challenge,” believes Mayuresh Joshi, fund manager at Angel Broking. However, he agrees that traders could play these counters ahead of the railway budget for short-term gains. There are better opportunities available in the market from a long-term perspective.

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“Investors must know that a lot is committed during the Budget, but the orders do not flow in immediately. While the order wins are necessary for these companies, bringing down the working capital cycle and timely execution still remain impediments. All these things need to improve, and this will not happen in a hurry. Till we see an improvement in the above-mentioned factors, railway-related stocks are best avoided. However, they do remain a trading bet ahead of the railway budget,” Joshi says.