Five railway stocks hit a detour: Fundamentals strong amid sharp corrections

Over the past two to three years, many railway stocks have delivered multibagger returns, rewarding investors with significant gains. Demand for these stocks remains robust, even amidst broader market fluctuations, with retail investors consistently scouting for the best opportunities in the sector.

Yet, 2024 has brought challenges. Despite a strong start to the year, which saw record highs, railway stocks are now under sustained selling pressure. Since peaking in July 2024, several have seen declines of 30% to 40%.

Read this | Indian railways wants to ride the gravy train. But there’s a catch

Here’s a closer look at fundamentally strong railway stocks that have recently corrected from their 52-week highs.

#1 Titagarh Rail Systems Ltd

Titagarh Rail Systems Ltd (TRSL), part of the diversified Titagarh Group, specializes in manufacturing railway wagons, coaches, and other rolling stock. However, its stock price has taken a significant hit, declining 40.9% from its 52-week high of ₹1,896.5.

The sharp correction follows a weak performance in the June quarter of 2024, where revenue from operations dipped 0.9%, despite an 8.4% rise in net profit. The subdued performance was driven by cost inflation, supply chain disruptions, higher operating expenses, and a sluggish export market for railway products.

Despite these headwinds, TRSL’s long-term growth story remains intact. Over the past five years, the company has achieved impressive compounded annual sales growth of 19.8% and profit growth of 40.9%. It boasts strong financial health, with a Return on Capital Employed (ROCE) of 20.5%, a Return on Equity (ROE) of 13%, and zero debt as of FY24.

Looking ahead, the company is optimistic about sustained demand for wagons, underpinned by government goals to increase rail traffic to 3 billion tonnes by FY30. For FY25, TRSL has outlined a capex plan of ₹7-10 billion to enhance production lines for Vande Bharat and other propulsion technologies, alongside technological upgrades and capacity expansions.

#2 Ircon International Ltd

Ircon International Ltd, a public sector undertaking (PSU) under the Ministry of Railways, is a key player in India’s infrastructure development. The company specializes in designing, constructing, and maintaining transport infrastructure projects, including railways, roadways, bridges, and urban transport systems, with operations spanning both domestic and international markets.

However, the stock has underperformed recently, falling 46.3% from its 52-week high.

The decline is also tied to a disappointing June quarter, where revenue from operations dropped 38.8%, dragging net profits lower.

The underwhelming performance stems from several challenges, including the loss of key projects, sluggish execution of large contracts, delayed client payments, rising raw material and borrowing costs, profit-taking, and overvaluation concerns relative to growth prospects.

Despite these setbacks, Ircon’s fundamentals remain strong. Over the past five years, the company has delivered a compounded annual sales growth of 20.8% and a profit growth of 15.6%. For the year ended March 2024, Ircon posted a robust ROCE of 18.3%, an ROE of 15.8%, and a manageable debt-to-equity ratio of 0.4x.

Looking ahead, Ircon is focused on a growth strategy targeting revenue of ₹200 billion within the next four to five years. The company is also diversifying into renewable energy, securing new contracts, and increasing its global footprint to build a stronger future.

#3 Indian Railway Finance Corp. Ltd

Indian Railway Finance Corp. Ltd (IRFC), a public sector undertaking under the Ministry of Railways, plays a pivotal role in financing the acquisition of rolling stock, tracks, and other essential assets for Indian Railways. It also raises capital through bond issuances in domestic and international markets.

However, the stock has experienced a sharp decline, falling 36.6% from its 52-week high.

The downturn follows a lacklustre performance in the June quarter of 2024, with net interest income (NII) dropping 7.9% and net profit declining 23.3% sequentially.

The weak performance reflects challenges such as external economic pressures, operational inefficiencies, delays in railway modernization, lower disbursements to Indian Railways, higher borrowing costs, and market volatility.

Despite these headwinds, IRFC’s fundamentals remain robust. Over the past five years, the company has delivered a compounded sales growth of 19.1% and a profit growth of 23.3%. For FY24, IRFC reported a healthy return on equity (ROE) of 13% and maintained a debt-free status.

Looking ahead, the company is diversifying its portfolio by seeking funding opportunities beyond Indian Railways and exploring collaborations with other infrastructure lenders. Strengthening internal mechanisms to support business expansion remains a key priority for future growth.

#4 RailTel Corp. of India

RailTel Corp. of India Ltd (RailTel), a PSU under the Ministry of Railways, was established in 2000 to provide telecommunication infrastructure and services for Indian Railways. Over the years, it has expanded its portfolio to include broadband, telecom, and ICT services for government organizations, businesses, and individuals.

Following its listing in February 2021, RailTel delivered positive returns, peaking during a strong rally in 2023. However, the stock has fallen 39.4% from its 52-week high in 2024, reflecting a weak June quarter where revenue from operations declined 32.9%, and net profit dipped 0.6%.

The decline stems from delayed project rollouts, seasonal factors, higher costs, and challenging market conditions. RailTel’s reliance on large-scale projects and government spending has made it vulnerable to execution delays and payment lags. Additionally, heightened competition in the telecom and broadband segments has exerted pressure on earnings.

Despite these headwinds, RailTel’s growth prospects remain robust. Over the past five years, it has achieved a compounded annual sales growth of 20.7% and profit growth of 17.2%. For FY24, the company reported a healthy ROCE of 18.7%, an ROE of 13.5%, and maintained a debt-free status.

Looking ahead, RailTel is targeting ₹40 billion in new orders over the coming year, with expectations of 30% revenue growth. The company is also investing in edge data centres at 100 locations, with a planned total capacity of 20 megawatts, to drive future expansion.

#5 Container Corp. of India

Container Corporation of India Ltd. (Concor), is a key player in India’s logistics and transportation sector. The company specializes in containerized cargo transportation services, catering to both domestic and international markets.

The stock has seen a significant decline of 34.1% from its 52-week high, driven largely by weak earnings in the June quarter. During this period, revenue from operations dropped 9.5%, and net profit decreased by 12.4%.

The slowdown in rail freight volumes, Concor’s primary revenue driver, has heavily impacted its performance. Additional challenges include delayed shipments, reduced demand from specific industries, inefficiencies in transportation, rising fuel and logistics costs, and lower utilization of container terminals—all contributing to weaker profitability.

Despite these short-term setbacks, Concor’s fundamentals remain solid. Over the past five years, the company has posted a compounded annual sales growth of 4.5% and a profit growth of 0.6%. For FY24, it reported a ROCE of 14.7% and an ROE of 10.7%, maintaining a debt-free status for five consecutive years.

Concor is optimistic about growth opportunities. The company plans to run double-stack trains to Nhava Sheva via the Baroda terminal and aims to capture additional market share through strategic initiatives, positioning itself for long-term success.

Conclusion

The railway industry has long been a favoured investment avenue, backed by its vast scale, government support, consistent growth, technological advancements, and diverse service offerings.

While recent corrections in railway stocks have raised concerns, the sector’s robust fundamentals indicate promising long-term prospects.

However, with the industry closely tied to government policies, investors should approach with due diligence and conduct thorough research before making investment decisions.

That’s it for today, happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com.