In recent weeks, railway stocks have hit a speed bump following a remarkable rally, leaving investors pondering their next move. Despite a promising overall outlook, some market participants are expressing concerns that railway stocks may have ventured into overbought territory.
A noticeable correction of around 15-20 percent has occurred after the robust surge in railway stocks. Anirudh Garg, partner and head of research at Invasset, attributes this recent selling pressure primarily to retail investors seeking to lock in profits. Importantly, this selling didn’t coincide with significant trading volume in recent days, he noted.
“Nevertheless, concerns regarding valuations of stocks in smaller market cap segments and profit-taking in railway stocks are key factors contributing to this decline. The recent sell-off has certainly tempered the segment’s valuations,” said Nirav Karkera, head of research at Fisdom.
Furthermore, many technical indicators for most railway stocks have been signaling euphoria as they entered overbought territory. While mid- and small-cap stocks are now under closer scrutiny, the perception of overvaluation in many railway stocks has led to some ruthless profit-taking, he explained.
The recent upswing in railway stocks can be attributed to underlying fundamental factors. A significant portion of this surge is due to progress in the government’s broader rail infrastructure and connectivity initiatives.
The segment has also attracted capital inflow due to sectoral rotation, with investors favoring railway stocks. Karkera pointed out that this progress is expected to translate into stronger order books and increased earnings growth in the future, but market participants have been pricing in this growth rather aggressively.
Notably, seasoned investor Vijay Kedia believes that the recent surge in defense and railway stocks is just the beginning, and these sectors have the potential for further growth over the next five to seven years. Despite being well-recognized, he recently suggested that they may have more room to grow.
There is also chatter in the market about potential mergers in the sector that could yield synergies, such as cost savings and improved efficiency for railway companies.
Recently, hopes for a brighter outlook emerged after the G20 summit unveiled a multinational rail and port deal connecting West Asia and South Asia, causing railway stocks to surge.
During the G20 summit in New Delhi, discussions centered on a new shipping and rail route connecting South Asia with West Asia and Europe. 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.
So, should you consider buying the dip?
The railway sector appears to be well-positioned, benefiting from policy-driven tailwinds and industry-specific factors that are expected to drive robust earnings growth.
However, it’s essential to evaluate each company in the sector individually in terms of valuations. Some pockets within the sector offer attractive valuations. Overall, at the segment level, the current sell-off can be seen as a healthy correction within a structurally robust uptrend, according to Karkera.
Considering the current valuations and significant shifts in fundamentals, Garg suggests that the railway sector now accurately reflects its true value.
Recent global developments further bolster the sector’s prospects. For example, the announcement of the India-Middle East-Europe Corridor during the G20 summit opens up new opportunities for the industry. Moreover, Bhutan and India are actively exploring opportunities to build a railway network that promotes interconnectivity, particularly for tourism purposes. “These initiatives are poised to contribute significantly to the sector’s growth potential,” added Garg.
Given these developments, Garg advises against booking profits at current levels. Instead, he believes it would be prudent to view the current sell-off as an opportunity to buy, especially for long-term investors.