Suddenly, rail related stocks have gained traction in the Indian stock market arena. It has become talk (or rather stock) of the town. The volume of investments that the government is pouring into this sector is the reason why Railways have become a hot zone for investors.
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Railways in India has a history that goes back to the Colonial era. It was one of the main source of travel for every Indian irrespective of their financial status. The poor and the rich reached the destination at the same time – in most cases very late – but travelled in different class and comfort. To be affordable, fares were heavily subsidised. Private investments in the railway sector was close to nothing. It was a government monopoly. In a socialist era, the government, the sole owner of Indian Railways, never cared to milk the large merchandising opportunity railways offered.
However, with liberalisation, changes started happening. Speed trains and comfort trains started segregating people according to the paying capacity. Those who could afford higher fares travelled comfortably and reached faster at the cost of others who travelled at subsidized fares.
With with advent of BJP government in 2014, infrastructure projects started gaining momentum, albeit at the expense of other sectors. Though new speed trains were introduced, the tracks were not equipped to handle the speed. A new vision 2047 was introduced where in 100,000 km of new tracks (which includes replacements and guage conversions) was envisioned over the next 25 years costing ₹15-20 trillion.
This ₹15-20 trillion is the pie everyone wants to put their hands onto. Indian Railways is one of the biggest rail network in the world employing close to 1.4 million people. It owns a total track length of 126,366 km with 7,335 stations. It operates 13,523 passenger trains and 9,146 freight trains daily carrying more than 1500 MT.(Figures may vary). And putting 20 trillion to this vast network may not be visible in the near term but it give lasting impact to the transportation network that India needs badly.
No, we are not putting the emphasis on the strength of railways here. But to make Railways modern, imagine the companies it has to incorporate to make this vision a reality. It needs modern stations, steel for tracks (1 Kilometer of laying will cost 15 crore), new coaches, electrification, power and a host of other ancillaries that is going to come up with huge results in the near term and long term.
Let’s call this phenomenon Rail invest. In the last two years, all the railway stocks have given manifold returns. The associated companies that provides goods and services to this sectors has turned green too. The order books and the books of accounts of these companies will continue to show positive turn for a long time to come unless the government rolls back its railway reforms, which is unlikely to happen irrespective of the government in power.
A few benefits of this methodology is that it can boost investments to the country, create more purchasing power and reduce the ever burgeoning job creation deficit. But it comes at the cost of fiscal deficit and a huge budgetary provisions have to be shifted from sectors like health and education and other social causes.
One more cause of worry is return on investments. The boost in investments should bring in revenue for its ultimate beneficiary, Indian Railways. The question is whether it has a plan when there will be a break even. Passenger fares doesn’t give railways its fair share as we all know. It is the freight that can boost the logistics business in the country. But it can happen only of there are huge gauge building. But the government itself doesn’t expect an increase of more than 4% in freight revenue in the coming year primarily because the work on ground has a long gestation period. The long awaited Dedicated Freight Corridor seems to be in cold storage as of now.
Conversion of coaches is itself an herculean task with so much of steel and other raw materials involved. But it is prudent to build new LHB type coaches than to convert the existing ones. Retrofitting modern amenities in old coaches is an expensive affair and a futile exercise in the long run.
Whatever way you see this development, stocks related to this entire ecosystem is going to get a huge boost in the next decade. For long term investors, identifying the correct stock in the Rail invest category and investing long term can get good returns.
A few of its associated sectors included tourism, hospitality, retail, logistics apart from the infrastructure partners in steel, power, equipment manufacturing and a host of other related sectors.
