NIFTY started the day flat at 19,258. Right from the first 5 min candle, the index moved up with strength, making higher lows, and moving up over 200 points to 19,460 levels. Nifty closed at 19,435, up by 181 points or 0.94%.
BANK NIFTY (BNF) started the day flat at 43,996. The index initially fell to 43,830 levels. But similar to Nifty, Bank Nifty also gave a strong upward rally of more than 700 points from the intraday low to resistance levels of 44,500 levels. BNF closed at 44,436, up by 446 points or 1.02%.
All indices except Nifty Pharma (-0.56%) closed in green. Nifty Metal (+2.8%) moved up the most.
Major Asian markets closed in the green. European markets are currently trading flat-to-green.
Today’s Moves
NTPC (+4.7%) was NIFTY50’s top gainer. The company said it will partner with Oil India to explore collaborations in the renewable energy, hydrogen space.
BHEL (+12.29%) surged after the company received an order worth ₹15,530 crore from state-run NTPC.
Stocks in the railway sector: RailTel (+15.5%), IRFC (+11.06%), RVNL (5.5%), and IRCTC (+2.43%) moved up with strength today.
Cipla (-0.9%) was NIFTY50’s top loser.
Brightcom Group (-5%) hit lower circuit for the 8th straight session since SEBI’s interim order.
Markets Ahead
Both indices witnessed strong buying at crucial support levels— covering the fall from the previous two sessions. This could just be a retracement of the fall from highs. So it’s essential to see if the markets break major resistance levels for a confirmed reversal.
Nifty: On a 2-hour time frame, the index is moving in a range between 19,240 and 19,460 levels— giving moves on both sides. The index has to cross the 19,600 zone for a trend reversal (which also represents the 50% Fibonacci levels). Till then, the immediate resistance will be 19,460 levels. If that’s breached, 19,520 and 19,600 levels could be the targets. The important support to watch out for is the 19,390-400 levels. And if that’s broken, the index can fall to 19,360 and 19,300 levels again.
Bank Nifty: The index is also moving in a very wide range between 43,800 and 44,800 levels, giving volatile moves. This up-move can still be a retracement as the 50% Fib level in BNF at 45,000 has to be crossed for trend reversal. Until then, the index will still be under a bearish trend. Now, the important resistance is 44,500— and a breakout from there can give us targets of 44,800 and 45,000. The immediate support level to look out for is 44,200. A breakdown from that level can give us targets of 44,000 and 43,800.
Today’s market up-move can be attributed to positive global signals, a domestic manufacturing PMI that exceeded expectations, and encouraging GDP growth data. India’s S&P Global Purchasing Managers’ Index (PMI) surged to 58.6 in August from July’s 57.7— reaching its highest point since May.
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As Amazon founder Jeff Bezos said, “21st century is going to be the Indian century”. Our country is striving towards becoming a global hub for the manufacturing and services sectors. With the help of various government initiatives, the Indian manufacturing sector could grow into a $ 1 trillion market by 2025. To achieve this goal, raw materials and finished goods need to be transported extensively across India. This is where the world’s 4th largest railway network comes in— the Indian Railways.
In this editorial, we shall analyse the key stocks that may benefit from the advancement of the Indian railway ecosystem.
IRFC
Indian Railway Finance Corporation (IRFC) is the financing arm of the Indian Railways (IR). The company raises capital by issuing bonds to banks and financial institutions. The Indian Railways approaches IRFC whenever it requires capital for new or existing projects. In the financial year 2021, the lender has provided 67% of the total capital outlay of IR.
The key metric used to track IRFC’s performance is Net Interest Income (NII). It is the difference between the interest received from borrowings and the interest paid to depositors. The lender reported a 43% YoY growth in NII from Rs 2,747 crore in FY20 to Rs 3,943 crore in FY21. Interestingly, IRFC has no bad loans or Non-Performing Assets (NPAs) in its books. The company is essentially lending to the government, which means that default risks are minimal.
The lender reported a 17% increase in total revenue to Rs 15,770 crore in FY21, compared to Rs 13,421 crore in FY20. Net profit increased 38% year-on-year (YoY) to Rs 4,416 crore in FY21. IRFC’s revenue has grown at a Compounded Annual Growth Rate (CAGR) of 11.7% over the past five years. Profit has grown at a 5-year CAGR of 36.4%, which defines the efficiency of the lender. The company’s Assets Under Management (AUM) stands at Rs 3,66,155 crore. It has grown at a 5-year CAGR of 18%.
IRFC’s return on equity (ROE) can be considered decent compared to similar financial institutions.
IRCON & RVNL
Indian Railway Construction Company Limited (IRCON) and Rail Vikas Nigam Limited (RVNL) are the two infrastructure wings of the Indian Railways. They undertake projects such as the construction of new rail lines, gauge conversion, railway electrification, major bridges, etc.
IRCON was incorporated in 1976 by the Central government. Other than railway projects, the company also undertakes general infra projects like highway construction, flyovers, signalling, and telecom. IRCON has an order book worth Rs 34,312 crore, out of which Rs 32,605 crore (~95%) are of railway projects. The company also has exposure in 21 countries, which covers 4.5% of its total order book.
IRCON’s profit after tax (PAT) margin has been declining and was recorded at 7.1% in FY21. The company’s revenue has been increasing over the years, but profits have not grown at the same pace.
Meanwhile, RVNL is relatively a new company. To overcome the lag in infrastructure progress in the railway sector, the government incorporated RVNL in 2002 (as part of the National Rail Vikas Yojana). The company undertakes operations and maintenance services of different rail projects.
We can see that RVNL’s revenue has consistently increased over the years. It has posted a 5-year CAGR of 20.3%. PAT has underperformed the growth rate of revenue, resulting in a CAGR of 15.7% over the past 5 years. RVNL’s PAT margin declined to 5.8% in FY21, compared to 7.3% in FY17.
Both IRCON and RVNL have registered a decline in profit margins over the past few years, meaning that the railway infrastructure is a low-margin business. However, these companies can benefit from the government’s target of 100% electrification of broad gauges by the end of 2023.
RailTel Corporation
RailTel Corporation of India is a telecom infrastructure provider that has an optic fibre network along railway tracks, covering 67,415 km across 7,321 stations. The company is well-diversified in its business operations.
National Long Distance (NLD) is the license for a telecom player to communicate over a long-distance network. The competitors in this segment are BSNL, Bharti Airtel, Reliance Jio, and Vodafone Idea (Vi).
Internet Service Provider (ISP)– RailTel offers internet and broadband services to banks, educational institutions, and government departments. Railnet is a special intranet connecting every zonal, divisional, sub-divisional office with the headquarters.
Infrastructure Providers Category-1 (IP-1) is the authorization given by the Department of Telecommunication through which the company can monetise its towers, bandwidth, and optic-fibre systems.
RailTel is also planning to leverage its expertise in communication networks to foray into new spaces. The company aims to digitalise 125 railway hospitals and 650 health units of the Indian Railways to create a Hospital Management Information System. It is also working on web-based administration systems for government departments and educational institutions.
Coming to RailTel’s financial performance, the firm reported a 20% YoY growth in total revenue to Rs 1,411 crore in FY21. PAT margin of the company has declined from 14% in FY17 to 10% in FY21.
IRCTC
Indian Railway Catering And Tourism Corporation Ltd (IRCTC) is the services wing of the Indian Railways. The company has direct business operations with end customers (B2C). Let us look at its business verticals:
The Covid-19 pandemic has severely impacted the company’s operations. While analysing the revenue split-up in FY20 (pre-Covid period), the catering segment contributed the largest share of the revenue. However, the vertical contributes only 16% to the Earnings Before Interest & Tax (EBIT). The internet ticketing vertical of the player has contributed 74% to EBIT.
IRCTC’s Internet Ticketing service has the highest profit margin. From 69% in FY19, it has increased to 78% in FY21. It means that for every Rs 100 the company earns as revenue through this segment, they are able to keep Rs 78 as profit. This makes it one of the most profitable businesses in the industry.
Conclusion
Apart from the companies mentioned above, there are other firms that contribute to different wings of Indian Railways. BEML, Titagarh Wagons, and Texmaco are some of the engineering companies that help build coaches, locomotives, engines, etc. However, these are small-cap companies whose financial performances have been poor.
Stock
Govt/Promoter Holding
Market cap
1-year return
IRCTC
67%
Largecap
210%
RVNL
78%
Midcap
103.5%
IRCON
73%
Smallcap
19.95%
Railtel
72%
Smallcap
21.33%
IRFC
86%
Midcap
1.4%
Rail stocks performance
Investing in stocks related to railways has a reliable advantage. These companies conduct normal businesses, but their audience is different from others. Catering to the railway sector makes them monopolistic.
Have you included rail stocks in your portfolio? Let us know through the comment section of the marketfeed mobile app.
