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Railway PSU stocks, once the toast of infrastructure enthusiasts, are now navigating choppy tracks. After recording spectacular multifold gains fueled by record government spending last year, they have now plummeted up to 50 per cent from their peaks, with most of the decline coming in just the last few weeks.
The writing was already on the wall. The government's railway capex had begun showing signs of plateauing with the FY25 budget, which saw only a minor single-digit increase in outlay. This trend has continued with a flatlined capex of Rs 2.52 lakh crore for FY26 in the recent budget, triggering a sharper underperformance.
Steep rise, then steep fall
| Companies | % increase (Jan 2023-June 2024) | % decline from 52-week highs |
|---|---|---|
| IRCTC | 2x | 35 |
| RITES | 2x | 48 |
| Rail Vikas Nigam | 6x | 45 |
| Ircon International | 4x | 52 |
| RailTel | 4x | 48 |
| IRFC | 5x | 46 |
The steep decline raises a pressing question: have valuations become attractive enough to consider these players? While their allure remains tied to India's massive infrastructure push, a closer look reveals why long-term investors might want to hold back on boarding this train.
The case for caution: When the government is your biggest customer
Railway infrastructure companies owe their success in recent years to massive government outlays. From Rs 1.10 lakh crore in FY22 to a staggering Rs 2.40 lakh crore in FY24, the government's railway capex unleashed a flood of opportunities. For instance, Rail Vikas Nigam's (RVNL) order book swelled from Rs 55,000 crore in Q2 FY23 to Rs 90,000 crore in Q2 FY25.
But here's the rub: dependence on government spending is a double-edged sword. The flatlining of capital infusion for FY26 now puts future growth at risk, hence the recent battering of these stocks.
In fact, the slowdown in capex that began last year has already made itself apparent. IRCON and RVNL , the two leading infrastructure players in the sector, have reported sales declines in three and two quarters of FY25, respectively, after a record run in prior years.
The reality of valuations
Even after the recent steep correction, valuations in the sector remain overheated. Consider IRFC: the stock once traded below its book value, but it now commands a price-to-book (P/B) ratio of over 3x—excessive for a government-regulated NBFC. Similarly, RVNL trades at a hefty 650 per cent premium to its five-year median P/E ratio.
For infrastructure companies, where earnings visibility is paramount, such high multiples leave no margin for error, more so in the absence of clear growth triggers.
Valuations remain heated
| Companies | Current P/E | 5-year median P/E | Average ROCE (FY19-24) |
|---|---|---|---|
| IRCTC | 50.1 | 67.9 | 50.2 |
| RITES | 28.0 | 15.0 | 28.8 |
| Rail Vikas Nigam | 57.2 | 7.6 | 15.9 |
| Ircon International | 18.4 | 10.3 | 18.7 |
| RailTel | 39.8 | 28.8 | 16.9 |
| IRFC* | 3.2 | 0.9 | 13.7 |
|
ROCE is return on capital employed *For IRFC, the given metrics are P/B ratio and ROE (return on equity) 4-year median P/E given for RailTel and IRFC |
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Structural risks
Then there are issues like lack of pricing power due to being tethered to government-regulated pricing structures, which leaves little room for margin expansion. Take IRFC , for example. Its lending rates are dictated by the government, restricting the margins it can earn.
Execution risks further complicate the equation. Project delays and prolonged payment cycles, hallmarks of government contracts, weigh heavily on these companies.
For long-term investors, these structural inefficiencies are a red flag. If earnings growth cannot keep pace with lofty valuations, the stocks are bound to face further corrections.
The outliers
While the outlook for railway PSUs is bleak, not every player in the sector is tied to government funding cycles. Two companies stand out:
-
IRCTC:
As the monopoly operator of online ticketing, catering, and tourism services for Indian Railways,
IRCTC
has diversified revenue streams. Catering (46 per cent of revenue) and ticketing (30 per cent of revenue) are driven more by passenger demand than government budgets, providing a cushion against funding freezes.
- RailTel: Offering telecom and IT services, RailTel earns just 10 per cent of its revenue from railway projects. Its diversified client base spans private enterprises, defense, education, and even international markets.
These companies are better insulated from the risks plaguing the sector. However, don't take them as our endorsements. We have simply mentioned them as they could be of interest to investors exploring the theme.
Remember
Dependence on government spending, inflated valuations, and inherent structural challenges make railway PSU stocks, particularly those heavily reliant on the sector, a risky and unstable bet. Long-term investors are better off staying on the sidelines.
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