Investors are falling in love with railway stocks all over again. Will they be betrayed?

Shares of Jupiter Wagons, IRFC, Texmaco Rail, Titagarh Railsystems and RailTel Corp corrected 10-34 percent during the July-October period.

After going through a phase of steep correction in the July-October period, railway stocks are back on the fast track, rebounding sharply over the past month. Analysts point to a series of positive catalysts fueling this turnaround, all of which have reignited investor interest in the sector.. With general and state elections now in the rearview mirror, optimism around increased government spending, clearing of stalled railway tenders, anticipation of the upcoming Union Budget, and more reasonable valuations have rekindled investor interest in the sector.

Siddhartha Khemka, head of research at Motilal Oswal Financial Services, believes that the combination of these factors has brought rail stocks back into focus. This renewed optimism has driven stocks like Jupiter Wagons, IRFC, Texmaco Rail, Titagarh Railsystems, and RailTel Corp to soar 15-26 percent in the past month.

"Government spending has remained weak in the current fiscal so far so the market is expecting it to gather pace in the second half of FY25, with stalled railway contracts coming out," Khemka said.

These expectations turned stronger after the union cabinet approved three mega railways projects with a capital outlay of Rs 7,927 crore in end November. These projects align with the PM-Gati Shakti National Master Plan for multimodal connectivity, further fueling optimism for continued investment in the sector.

Also, with just a month and a half left for the Union Budget, investors are also brewing hopes for additional support to bolster Prime Minister Modi’s push for improved connectivity, Khemka remarked.

Sanjeev Hota, head of research at Sharekhan, also highlighted the sector’s robust growth prospects and strong business visibility given the government's infrastructure focus.

Meanwhile, the sharp correction in most railway stocks, including Jupiter Wagons, IRFC, Texmaco Rail, Titagarh Railsystems and RailTel Corp that pulled these scrips 10-34 percent lower during the July-October period, provided a further relief on the valuation front.

According to analysts, this pullback was necessary after the sector's meteoric rise over the past two years inflated valuations to unsustainable levels. Khemka also attributed this correction, which stripped these stocks off their record highs as another trigger that prompted investors to give it a re-look.

While Khemka believes the current levels present an opportunity to allocate some funds to railway stocks, he also cautioned that the market’s expectations must align with actual government actions to sustain order momentum. "While there is lots of hope and anticipation, government activity should also align with the expectations to ensure order momentum for the sector remains strong in the future as well," he said.

On the other hand, Hota offered a more cautious perspective, suggesting that the risk-reward trade-off remains unfavorable despite the recent correction. On that account, Hota prefers to not increase allocations to the sector and rather wait for a steeper correction.

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