- 7/19/2024
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NewsTranscript
00:00Hello and welcome. You are watching Budget Trade and this is Samina Nalwala.
00:13Railway stocks are literally on a high and with fresh highs ahead of the union budget.
00:18While the budget which is going to be tabled on the 23rd of July is seen as a people's
00:22budget, what is sticking for the railway counters? Stocks like RVNL, IRCON, International IRFC
00:28and a whole other bunch of listed railway companies were trading at their all-time highs.
00:33On Friday, the Union Minister Ashwini Vaishnav announced the production of 2,500 new general
00:39passenger train coaches and approved an additional 10,000 coaches. Talking about railway infrastructure,
00:45he said that about 5,300 kilometers of railway tracks have been added so far this year and
00:51about 800 kilometers have been added. Well, keeping that commentary in mind, budget stocks
00:57or Modi stocks like they are more popularly known as have been seeing aggressive buying interest.
01:02But let's go to my colleague Anushi first who takes us through what is the sector expectation
01:07from the much anticipated budget in a few weeks.
01:13With the upcoming budget, railways continues to remain in focus. We have seen a sharp jump
01:18up in stock prices of some of these railway counters. Look at an RVNL, 38% of gains in
01:23this last one week itself. Now, if you even look at one year, there has been a rally in
01:28most of these counters. Here again, IRFC leading the pack, 500% gains of the count while other
01:34railway stocks also, if you see, most of them clocked about a 2 to 3X times of growth in
01:39their stocks. But what is happening? What's the budget allocation over the years? Let's
01:43understand that. So, if you look at the FY22 to 23 period, 1.5 lakh crore of allocation
01:49from the budget side for the Ministry of Railways, which has now, which has then increased
01:53about 2.4 lakh crores of 50% jump that we are looking at. Coming to the interim budget
01:58of this year, 2.52 lakh crore is what was the allocation. But here what's interesting
02:03over here, if you go back to the 2003 to 2004 to 2005 period, the allocation was 8000 crore.
02:09So, we are seeing a sharp jump in this allocation over the years. So, with this, again, we can
02:14just look at the railway track that they have built over the years to get a better sense.
02:18So, during 2004 to 2014, there was about 15,000 route kilometre built. But if we go
02:24back to 2014 to 23 period, we are almost seeing this number doubling to about 25,000 route
02:29kilometre. Again, major projects that continue to remain focused for this budget and even
02:34the previous budgets include the Gati Shakti Cargo Terminal, the Vande Bharat Trains, Bharat
02:40Gaurav Trains as well as the Atma Amrit Bharat Stations and Trains. Again, key highlights
02:47of this interim budget include implementation of three economic railway corridor programs.
02:53This was about energy, mineral and cement corridors, the port connectivity corridors
02:57along with high traffic density corridors. This, but what stood out for this budget was
03:02the conversion of 40,000 conventional rail bogies to Vande Bharat standards. So, here
03:08some of the key players that continue to remain in focus include Teetha Ghat Rail and Jupiter
03:13Wagons. But other than that also there were some key developments which happened over
03:16the years. This includes cabinet approving about six multi-tracking projects across Indian
03:21railway in six states. This project is estimated to be around 12,000 crore and this will be
03:26fully funded by the centre. So, with this we will be seeing about 1020 kilometre extension
03:32in the existing network of Indian railways. So, these are some of the prime budget expectations
03:37that we can see for Ministry of Railways this time.
03:40Interesting, sharing the markets already running ahead of themselves with regard to
03:45those expectations. But we have with us Ashish Mudani, Senior Vice President and Co-Group
03:50Head, Corporate Ratings of ICRA, joining us to talk to us about a relatively smaller sector
03:55but nevertheless very important at this juncture. Thank you Ashish for joining us this afternoon.
04:01Ashish, there is so much of excitement, conversations, we have seen the stocks run up significantly
04:07in the last couple of weeks to the run up to the budget. The interim budget was exciting
04:14for rail counters. As we go into budget 2025 on the 23rd of July, what do you think is
04:22going to be the big bang announcements for the railway sector? To begin with actually
04:26will there be any big bang announcements for the railway sector?
04:31Hi Samina, good afternoon. What we are expecting in the overall capital outlay level, let me
04:37just talk from a broader perspective and I come back to the railway subsequently. We
04:41are not expecting a major deviation from this 11 lakh crore number that has been announced
04:47during interim budget. Because if you look at the first two months of the current year
04:51that is April and May, the overall capital outlay is down by almost 14%. Now quarter
04:56two being a leaner quarter, so a lot of ramp up is expected in quarter three and quarter
05:00four. So we are not expecting a major hike or outlay increase in whatever was announced
05:08in the interim budget at a broader level. But one should note that the 1.6 lakh crore
05:14delta that has been announced in the interim budget from the last year, the capex incremental,
05:19out of that 70,000 crore delta is largely driven by an item which is classified as new
05:25steam. Now, because of that, what is interesting to see is how that amount of 70,000 crore
05:32gets allocated within various ministries. So that is something that needs to be watched
05:36out for in the coming budget. But if you look at the railway capital outlay, it has grown
05:42by almost 12% CAGR for the last five years. And that is very, very impressive. Even the
05:46number that you were showing some time back, while the year on year outlay may look modest
05:52in a low single digit, but if you compare it with the FI23 number, it's almost 50% high
05:56number. So there has been a strong ramp up that has already happened. Now what has benefited
06:01out of this is largely if you look at the two specific segments, while we are talking
06:05about incremental drags outlay, we are talking about multiple wagons and rolling stock manufacturer
06:11benefiting, but two specific things I need to highlight over here is the outlay, which
06:16is towards the rolling stocks and also the Amrit Bharat station or what we call railway
06:23station development. A lot of impedances over there, just to give out certain numbers over
06:29there in FI23, the item under customer amenities, which is broadly covered the station development
06:35that is only 2200 crore. Now that has been hiked almost seven to eight times in the current
06:41budget. Now it is almost 16,000 crore plus. So the players in this segment are expected
06:45to benefit. Similarly, if you talk about the wagons and the rolling stock manufacturer
06:49because of this all time high order awarding that has happened. So all these wagon manufacturers
06:56are sitting on a very strong order book and they're also going to significantly benefit
07:00from this particular thrust. But if you look at the broader thing, we are not expecting
07:05any material or major deviation from what was announced in the interim budget.
07:11Ashisha, just take a step back and you talked about the capital outlay. Now I want to broaden
07:16this discussion, not just sticking with railways, but logistics as whole as well, because you
07:20know, I was having a chat with Tata projects and they said, for India to become a manufacturing
07:25hub, we have to bring down logistics cost. So I want to bring in road as well into this
07:30conversation. How do you think or who do you think could be a key beneficiary of this increased
07:35capital outlay? In terms of allocations, which sectors stand to gain most in the space?
07:40My team also tracks the road sector. So when you talk about road and railway combined,
07:46both of them are a major beneficiary in the last 10 years. And the statistics also showcase
07:50that. The current year, the number looks modest if you look at on a buy-buy basis. But if
07:56you look at it in the broader perspective of the last five year or 10 year horizon,
07:59the number looks impressive. And both is like what you rightly told, if you want to become
08:05a manufacturing hub, if you're talking about a 5 trillion economy, we are talking about
08:10reduction in the logistics cost. Railway will definitely play a very vital role. And so
08:14is the road segment. So both this segment, I don't want to differentiate between any
08:19one of them. Both of the segment will be a major beneficiary and will continue to see
08:23a strong impetus going forward also. Right. You know, while this is going to be
08:30a significant beneficiary of the government's outlay and capex plans, what do you feel
08:38or which companies do you feel stand to benefit the most? Because some may argue that a lot
08:44of this may already be in the price. You know, one thing is winning orders. But what else
08:48needs to before we go into companies, actually, what else needs to be done in this budget
08:52to improve the balance sheet of these railway companies, improve cash flow and generally
08:57make them or bring them up to speed with some of the other private sector players?
09:02So, I mean, if you ask me, the two specific items that we feel, as ICRA, we feel that
09:08that needs to be focused on from the railway side is one is the monetization thing. I think
09:12there is a significant lag to what was the initial target and the number that has actually
09:17been delivered. So in monetization front, there is a lot of scope. And the second space
09:21is the public private partnership. While in the road segment, we have seen a strong ramp
09:25up and things have largely stabilized and the landers are also very comfortable over
09:29there. But in railway segment, we have not seen much of the public private partnership
09:33over there. And that's where the government has to put a lot of funds. So if the public
09:37or the private money comes over there and that gains traction, it will be beneficiary
09:42for the overall everybody in the system and all the stakeholders will benefit out of it.
09:47Right. And in terms of railway stocks, Ashish, or companies, who stands to benefit the most
09:53from this budget 2024 or 2025? Of course, what stands out for me is the fact that there's
09:59every morning RVNL is either bagging an order locally or internationally.
10:04Yes, I mean, I won't like to comment on any company specific thing. But as a sector, if
10:09you ask me, we have seen a lot of competition in the road segment in the last one year because
10:14of declining the order inflow. So many of the civil construction entities, they have
10:20received station development on projects and they are building on their order on this
10:24particular segment. So this is one pie, which is going to benefit some of the EPC entities
10:29also who are already executing projects or getting new projects in this particular segment.
10:35Wagon manufacturers, if you have seen that order book is pretty strong for the next two
10:39to three years. So they're also well placed on that front.
10:42Right. Ashish also, while you can't talk to me about specific companies, but in terms
10:47of preference, do you prefer the private players, the public sector, PSU players? Because
10:51the gains are very obviously in the PSU names more than what we are seeing amongst the private
10:56names. Samina, if the capital outlay is going to increase, everybody in the ecosystem will
11:04benefit. So even if RVNL is getting these orders, eventually some of this will get subcontracted
11:09to the private players also. So at a broader level, if you look at almost all the players
11:16who are in the system will benefit out of it.
11:18Right. And very lastly, Ashish, while you can't comment on stocks and you would like
11:23not to do that, just at a more macro level, there are wants and there are needs, right?
11:28What do you think is imperative for the real sector to see in this budget announcement?
11:39In terms of prioritizing the needs?
11:44It's a very tricky topic because there are multiple priorities for the sector. But if
11:50you see from the government's point of view, two or three things very clearly stand out.
11:56One is the monetization. I think that needs to gain traction and some measures need to
12:00be taken in place so that they get certain money out of it to fund incremental growth
12:06or capex in the sector. Second is a public-private partnership. The private sector needs to
12:11be encouraged over here. And the third, again, going forward will be the investment towards
12:18safety. And I think that will continue to be, I think a lot of investments have happened
12:24in the last four or five years. And I think this is one of the key priorities for the
12:27government. And this will continue to see a lot of traction going forward also.
12:30Right. Thank you very much, Ashish. Great talking to you and getting a perspective on
12:34roads and rails and what the sector expects from this much anticipated budget.
13:04Can we get a drastic correction or a strong bout of profit-taking?
13:08Good morning, Semina. So as far as broader markets are concerned, yes, we are hitting
13:13fresh all-time highs, but we need to check a few of the data points in the sense that
13:17if you look at the total profit made in 2019 of 50 companies and 2024 profits, ideally
13:26these profits have grown at a CAGR of 18 percent. And that's the CAGR we have seen in terms
13:30of market capitalization growth. Also, if you look at from a forward PE multiple basis,
13:36Nifty is trading around 20 forward PE multiple, which is at a slight premium to its 5-year
13:41average. At the same time, if you look at high frequency indicators, whether it's electricity
13:46bills or whether it's e-way bill generation, all these are in a very, very strong uptrend.
13:51And we are seeing a very strong GDP expansion, almost 8 percent GDP growth we have witnessed.
13:57And in days to come, we believe that 7 to 8 percent is the GDP growth we are expecting.
14:02So keeping all this data in points, it looks like if any correction comes, it's going to
14:07be a buy-on-dip kind of opportunity. And from a technical perspective, we believe that we
14:12are in a very, very strong trend. And a lot of these sectors, whether it's IT, banking,
14:18financials, they have not contributed significantly in the last one year bull run to the broader market.
14:25So looking into this, we believe that if this sector starts to contribute to this rally,
14:30then there's a further leg to the rally. So I think any dip of 4 to 5 percent would be
14:35a very good opportunity to add on to the market. So we don't expect any significant
14:40correction in the broader market. And if any correction comes in the range of 5 to 6 percent,
14:45that would be an ideal opportunity to add further positions into the market.
14:49Ashish, but at the current juncture that we are at, are you open to putting fresh money to work
14:56within, say, you know, budget trades, railways, defense, fertilizers?
15:02These are stocks and sectors that have been rallying up on anticipation of a budget that could be favorable to the sector.
15:09But what I want to understand is, should somebody take a fresh bet just ahead of the budget?
15:14Is that a good tactical trade?
15:17So, Samina, I'll give a disclosure that, you know, in terms of our PMS in the last 15 months time frame,
15:22we have been building a lot of positions in defense and railway and, in fact, power also.
15:27So these were the three sectors where we were significant overweight.
15:30And actually, a lot of these stocks in our portfolios have gone up significantly in the last couple of months,
15:37whether it's into defense or railways. So as far as fresh allocation is concerned, yes,
15:42the risk reward looks a little stressed at this point of time.
15:45But in terms of opportunity size, we believe there's a phenomenal opportunity which is being seen in this space.
15:52But definitely from a valuation perspective, we are not very comfortable.
15:56But yes, in our portfolio, we are holding these names and continue to hold these names because, you know,
16:02our entry price and the current levels are giving us that comfort.
16:07But if the fresh allocation comes, then I think, you know, one need to be a little tactical or kind of,
16:14you know, create a position in a staggered manner rather than at one go.
16:17Now, in terms of opportunity size, you know, first thing which I would like to point out is if you look at financial year 13,
16:23the railway capex was close to 49,000 crore. But in financial year 23, this capex number was close to 2,45,000 crore.
16:32And in financial year 28, we expect this railway capex to reach almost 3,80,000 crore.
16:37Which means from current to financial year 28, we are expecting a 10% cagger in terms of railway capex.
16:43And if this happens, then there is going to be a lot of opportunity which we are going to witness in the wagon segment,
16:49in the Vande Bharat segment, in the metro coaches segment.
16:54And that's the reason companies like Teetagar Wagon, as a disclosure, we have been holding Teetagar Wagon since 32330 levels in our portfolio.
17:01And this stock has, you know, we started tracking the stock when the stock was doing a monthly wagon production of almost 75.
17:09And currently this company has crossed a monthly capacity of almost 1,080 wagons a month production.
17:15And now they are looking for passenger coaches also. So that's a new optionality which is coming into the business.
17:21So keeping this in mind, I think it's a good opportunity, but stock is at an elevated level.
17:26So we suggest that any good dip of 7 to 10% correction in these stocks would be a good entry point for stocks like Teetagar Wagon or Jupiter Wagon.
17:35Or for that matter, a company like BML, which is into metro coaches, which is into Vande Bharat opportunity,
17:41and also opportunity of defense and mining construction is also there in BML.
17:46So these are the names which I think on any dips, this opportunity is really large.
17:51And these companies will be a big beneficiary of this opportunity.
17:54But as a disclosure, we continue to hold Teetagar Wagon and BML in our portfolios.
17:59With that disclaimer, Ashish, the risk reward may not be so favorable if you've got to make fresh allocations to some of these railway stocks.
18:08But if one wants to make use of the current opportunity, and if you do get that correction of 5 to 10%,
18:15beyond the three names you mentioned, would you add any more railway stocks in terms of preferences?
18:20How about RVNL? Because that seems to be winning orders pretty much every single day.
18:24Railtel and IRCTC, do those also look good to you from now until the budget?
18:30It's a tactical call, fundamentals and technicals in mind.
18:34Yes. So I think Railtel is a very good opportunity, according to me.
18:37And I think we as a disclosure, we have this stock in our portfolio as well.
18:41Because we believe that, you know, in terms of Railtel, coverage is a very big opportunity.
18:46We have so far deployed almost 1465 route kilometer coverage as an opportunity.
18:52And this is a very large opportunity, which we believe is going to come.
18:56So obviously in the public sector space, Railtel is going to be a big beneficiary of this entire coverage opportunity.
19:03Apart from that, some of the private players like HBL Power is also a very big beneficiary of this coverage opportunity.
19:10So as a disclosure, we continue to hold Railtel and we continue to like it from a technical perspective, even at current levels.
19:16My sense is stock is forming a very, very strong base after consolidating for last six months.
19:22So there is a strong support at 10% lower level in Railtel.
19:28And looking into the long term chart, it looks like stock is headed towards 700-750 kind of trajectory.
19:34So our preferred pick in this entire space would be Railtel.
19:37With a disclosure, we continue to hold the stock in our PMS also.
19:41As I mentioned in the Wagon space, it's T-Tugger and Jupiter Wagon, which looks very promising.
19:47DML is one stock which we like from this perspective.
19:50Also, if you look at from an electrification perspective, companies like Siemens as an MNC company is also going to be a big beneficiary of the railway capex, which we are going to witness.
20:01Stock has already seen a very strong rally, but my sense is stock is forming again a very strong base around 7400 kind of trajectory.
20:09So I think Siemens is also one stock which looks very good in the large cap MNC space for playing this entire railway opportunity.
20:19Ashish, I'm going to be a little more greedy and just move the conversation beyond real stocks.
20:24Any more stock ideas, strategies that one could consider for the upcoming union budget where you still feel that there is a favorable risk reward?
20:34Yes. So I think Samina, power is one space which looks very promising.
20:38We have been very constructive on the defense space, but the stocks have seen a massive rally.
20:43We continue to like this defense opportunity because of the strong order book, because of the strong, I would say, the revenue visibility, which we witnessed.
20:51Because of the indigenization factor, we have seen for a company like Baradynamics, which used to do a 65% indigenization at one point of time, is now doing indigenization close to 91%.
21:01So the operating margins have jumped up. Same is the case for a company like Solar Industries, which is into explosives.
21:08The current top line, almost 15% comes from defense, and it is going to go up.
21:14So these are the opportunities which look promising, and as a disclosure, we continue to hold these names.
21:19But from a current risk reward perspective, I think power is one space which is offering a very strong risk reward.
21:26Within that, I think, as we say that, you know, the current capacity from 176 gigawatt is going to become 500 gigawatt, which implies a 17% capacity growth in the renewable energy segment.
21:38So obviously, different companies, whether it's NTPC in the power generation, which is going to create almost 30 gigawatt of renewable energy capacity.
21:46In terms of grid, I think grid connectivity, power grid would be a big beneficiary of this trend.
21:52In terms of high voltage, you know, HDBC player, Hitachi Energy or Power India, which we call today, is a company which is going to be a big beneficiary of this entire grid connectivity space.
22:06And then some of the, you know, wires and cables player like Apar Industries.
22:11These are the names which we believe are going to be a big beneficiary of the CAPEX, which we are going to witness in the power space, and these companies still offer reasonable risk reward.
22:20As a disclosure, we continue to hold these names in our portfolios.
22:24It's amazing. We always, you know, have people and viewers writing and asking for mid-cap ideas and some of the names that you mentioned will, of course, make good investment opportunity.
22:33Thank you, Ashish. It was always good talking to you. Have a good day and we'll speak to you soon.
22:38Thanks, Amin.
22:39With that, we're completely out of time on Budget Trades. Thanks for watching.
22:50Thank you.