Investors in this railway stock have of late been like a dog with two tails!
Keeping in mind the Indian government’s massive railway capex and infra push, market participants find Rail Vikas Nigam Ltd (RVNL) a good investment. The government’s thrust on improving infrastructure for rail transportation by adding new lines, doubling existing lines, electrification, and so on are seen providing a constant flow of business for the company.
Yet, during the quarter ended March, consolidated revenue of the company slumped 11 percent YoY to Rs 5,719.8 crore. Net profit fell 5 percent to Rs 359.2 crore. Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) was down 8 percent YoY at Rs 374.37 crore whereas the EBITDA margin was flat at 6.5 percent compared to 6.3 percent a year ago.
The decline in net profit was due to a number of factors, including higher cost of materials and services, slowdown in execution of projects and delay in receiving payments from the government, said Vinit Bolijkar, Head of Research, Ventura Securities.
Interestingly, Domestic Institutional Investors and public shareholders have been raising their stakes in this railway infrastructure company since June 2020, and since then the stock has rallied over 500 percent!
Valuation
From a valuation standpoint, RVNL's stock looks expensive, said Bolijkar. “The company's price-to-earnings (P/E) ratio is currently at 17.6 times, which is higher than the P/E ratio of its peers. However, the company's P/E ratio is still below its historical average of 20 times,” he said.
RVNL's stock is also trading at a premium to its book value of 1.53 times. This premium is justified by the company's strong order book and its track record of execution, according to him.
The railway infrastructure company had an order book of more than Rs 56,000 crore as of March 31, 2023, according to its latest conference call with analysts. Out of this, orders worth Rs 36,977 crore came from the Railway Ministry while Rs 20,000 crore were by way of bidding. According to analysts, the order book provides revenue visibility over the next few years.
Besides, the company has a robust balance sheet and is available at an attractive dividend yield of around 2.5 percent.
More legs to the rally?
Even with a strong order book and a track record of execution, the stock is currently trading at a high valuation, and there are some risks to consider, such as government policy risks and a potential rise in the cost of materials and services, Bolinjkar said.
Kkunal Parar, Vice President of Research at Choice Broking, suggests booking profits in the stock at the current level. He sees no upside as of now. If the stock falls to Rs 85-90, one can consider buying RVNL, he says.
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