Railway stocks derailed: Should you accumulate?

Railways as a segment appears to be strongly positioned from policy-led tailwinds and business-specific factors

While a correction has meant that railway stocks have taken a temporary detour from their stellar rally, what investors are wondering is whether it is the end of the line. Despite a generally robust outlook, a portion of the market is expressing concerns that railway stocks may have entered overbought territory.

Railway stocks have indeed undergone a correction of 15-20 percent after a robust surge. Anirudh Garg, partner and head of research at Invasset, highlighted that the recent selling pressure can be mostly attributed to retail investors seeking to book profits. Notably, this selling didn't align with substantial trading volume in recent days, he added.

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“Nonetheless, concerns around valuations of stocks across the smaller market cap segments and profit-booking in rail stocks are key reasons that such a decline can be attributed to. The recent sell-off has definitely taken some froth off the segment’s valuations,” said Nirav Karkera, head of research at Fisdom.

Additionally, many technical indicators for most rail stocks have been indicating euphoria as they traded in overbought zones. While mid- and small-cap stocks are now under greater investor scrutiny, the perception of overvaluation on most railway stocks featuring here has led to rather ruthless profit-booking, he explained.

Also Read: Experts see no change in PSU fundamentals, despite sharp correction in stocks

Railway stocks have seen a notable upward trend in the past few months, thanks to underlying fundamental factors. The majority of this surge can be attributed to advancements in the government's broader rail infrastructure and connectivity initiatives.

The segment also witnessed some buying action on account of some sectoral rotation of capital moving in its favour, highlighted Karkera. “While this progress is expected to percolate into order books and bolster earnings growth going ahead, market participants have been pricing in such growth rather aggressively,” he added.

Marquee investor Vijay Kedia believes this surge in defence and railway stocks is just the beginning and they have the potential for further growth over the next five to seven years. Despite these sectors being well-recognised by the market, he recently suggested they may have more room to grow.

Further, there's talk in the market regarding potential mergers in the sector that could bring about synergies like cost savings and improved efficiency for railway companies.

Earlier this week, hopes of a brighter outlook after the G20 summit unveiled a multinational rail and port deal connecting West Asia and South Asia sent railway stocks spiralling upwards.

A new shipping and rail route connecting South Asia with West Asia and Europe was discussed at the G20 summit in New Delhi. The US, India, Saudi Arabia, UAE, EU and other G20 partners are exploring a trade, energy, and data corridor from India to Europe via West Asia.

Also Read: On the horizon: Should you buy into the dip in defence stocks? 

Should you buy the dip?

Railways as a segment appears to be strongly positioned from policy-led tailwinds and business-specific factors that will pave the way for robust earnings growth.

However, in terms of valuations, every company operating in the segment must be viewed distinctly. There sure are pockets where valuations appear attractive to reasonable. Overall, at the segment level, the current sell-off can be perceived as a healthy correction within a structurally robust uptrend, elaborated Karkera.

Keeping in mind the current valuations and significant shifts in fundamentals, the railway sector now appears to accurately reflect its true value, Garg said.

The recent developments on the global stage further enhance the sector's prospects. For instance, the announcement of the India-Middle East-Europe Corridor during the G20 summit opens up new avenues of opportunity for the industry. Moreover, Bhutan and India are actively exploring opportunities to construct a railway network that fosters interconnectivity, particularly for tourism purposes. “These initiatives are poised to contribute significantly to the sector's growth potential,” added Garg.

Considering these developments, Garg advises against booking profits at the current levels. Instead, he believes it would be wise to consider the current sell-off as an opportunity to buy, especially for long-term investors.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.