Should you go for railways stocks post G20 India-Saudi-Europe corridor plan? Devang Mehta answers

Devang Mehta, Director - Equity Advisory, Spark Private Wealth, says “I do not see extremely bad times for railway, defence or infrastructure companies. But one has to be cautious at this level where stocks have tripled or quadrupled in the matter of three, four, six months time. So, that caution should be exercised a bit when you get into this type of businesses on stories rather than on earnings and cash flows.”

There was a big spurt in all the railway names on Monday. Would you be buying any of these names afresh or adding to your existing portfolio positions or recommend post the rail and port deal?
The message was quite clear when we talked about G20 rail and port deals and stuff. Most of this seems to be more symbolic right now. But as we go forward, there is a theme which has come out. Earlier, I do not remember the PSU type of theme or railway. Earlier, if you remember, the railway stocks used to do well only before the Railway Budget, the 10-15 days or one month before the Railway Budget and the rally used to die down.

But this time, probably a lot of companies are seeing order growth. A lot of these companies are executing this order flow, be it metro, be it mono, be it railway signal systems, the safety enhancement features or the internetisation if I can use that word of railway platforms. Most of this seems to be right now in the price.


But yes, going forward, if capex is going to be the buzzword for government as well as private capex, defence spend for government, railway spend for government is on the rise. Selectively, yes, we will be buyers in some of these businesses, but not all these businesses for sure.

What is it you are making of the defence stocks? What is really happening with the entire shipbuilding segment as well? All of these stocks have seen a flare up. Do you think there is still value on the table?
Value is probably debatable. The price to earning re-rating has happened for most of these businesses. Why has it happened? I think the narrative was well explained in terms of Make in India for defence equipment, import substitution, efficiently-run companies, plus execution capabilities. Most of this has been shown in the last three or four quarters that this story seems to be at least dependable. But the major part is that most of the stocks have run up ahead of times.

Most of these companies traded at 0.5, 0.7, 0.8, price to book and are now trading at around 2 to 2.5, and on PE basis, extremely expensive. But now the test is on the earnings front. If the earnings are sustainable, if the cash flows are sustainable and whether the government has the same focus on capex as well as manufacturing, that needs to be seen. Ideally, it looks like Rs 10 lakh crore of capital expenditure on infrastructure, plus around Rs 2.5 lakh crore on railways, plus more spending on the defence side as well and Make in India import substitution, are all playing out very well.

I do not see extremely bad times for these companies. But one has to be cautious at this level where stocks have tripled or quadrupled in the matter of three, four, six months time. So, that caution should be exercised a bit when you get into this type of businesses on stories rather than on earnings and cash flows.