Every year, ahead of the budget, investors get excited about the prospects of incremental spending by the railways that would translate into order inflows for railway infrastructure companies. Perhaps this expectation drove shares of Indian Railway Construction International Ltd (IRCON) andRail Vikas Nigam Ltd (RVNL) up by 5.6% and 3.4%, respectively, on Wednesday.
Incidentally, IRCON and RVNL shares hit their respective all-time intraday highs of ₹351 and ₹647 on the same day – 15 July – and have come off substantially since then.
Based on IDBI Capital’s estimates, IRCON’s valuation appears reasonable, at a price-to-earnings (P/E) multiple of 23x for FY25. But its order book is just enough to cover two years of FY24 revenue and, more importantly, the order inflow is not picking up.
RVNL has higher revenue visibility, with a robust order pipeline that’s enough to cover four years of FY24 revenue. But a high valuation at a P/E of 58x is a worry. Interestingly, the Ebitda margins of both companies are in the range of 5%-6% as nominated orders from the railways still dominate revenue.
IRCON’s order book at ₹24,253 crore at September-end is down 11% from March-end. Now, it is not as though the fall in the order book was due to higher execution and corresponding revenue growth as sales slid by 18% year-on-year.
The shrinking order book can be explained by the Railway Board’s capex. The board spent ₹1.16 trillion in H1 of FY25, down 19% year-on-year. IRCON’s dependence on the railways is significant, accounting for almost 75% of the order book, despite its diversification efforts.
Revenue outlook
IRCON does not expect revenue to grow in FY25, while RVNL expects flattish revenue.
RVNL’s H1 sales fell 15%, with the saving grace being the rise in its order book to ₹92,000 crore at September-end, up 8% versus March-end. Nominated railway orders form about 60% of RVNL’s order book.
Sure, higher order announcements by the railways are likely in H2 of FY25 as the H1 capex was just about 45% of the FY25 target of ₹2.6 trillion. But even if the full-year target is achieved, it will still be a marginal rise of 2% over the revised FY24 estimate.
Net profit at both companies dipped in H1. With limited scope to boost Ebitda margins of about 6% currently, only a ramp-up in execution can aid revenue and profit growth. Otherwise, the sporadic rallies in their stock prices on expectations of orders are unlikely to sustain. The shares of both companies fell on Thursday.