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FDI nod sees rail, defence related stocks trade mixed

A day after the Union Cabinet gave its consent to the foreign direct investment (FDI) proposal, stocks related to railway and defence are trading mixed.

The Cabinet, post market hours on Wednesday, cleared the proposal to allow 100% FDI in railway infrastructure and also raised the composite FDI cap in the defence sector to 49% from the existing 26%. However, it has not permitted FDI in train operations and safety.

“The Cabinet clearance as regards FDI in railways is a welcome step. However, one must realise that the FDI has been permitted in the construction / infrastructure space. As regards defence, the transfer of technology is key. India is one of the largest buyers of arms globally. So from that perspective, domestic manufacturers would be interested in transfer of technology from their foreign partners, which is missing in the cleared proposals. That is one reason why defence related stocks haven’t done too well in trade on Thursday,” said Tirthankar Patnaik, director (institutional research), Religare Capital Markets.

Among railway stocks, shares of wagon-maker Texmaco Rail and Engineering has gained 9% to 101 on the Bombay Stock Exchange (BSE). The stock surged 16% to Rs 106 during intra-day trade and has seen over ten-fold jump in trading volume with a combined six million shares changing hands on the counter till 1115 hours on BSE and NSE.

Kalindee Rail Nirman, Titagarh Wagons, Hind Rectifier and Kernex Microsystems hit the upper circuit limit of 5% in intra-day deals, while BEML is trading 4% higher at Rs 715 on the BSE.

However, most of these stocks have underperformed the market post Railway Budget (when the FDI proposal was unveiled) by falling by up to 30%, as against less than 2% decline in benchmark index till Wednesday.

Texmaco Rail (down 31%), Kalindee Rail Nirman (down 29%), Titagarh Wagons (down 26%), Kernex Microsystems (down 24%), Hind Rectifiers (down 20%) and BEML (down 14%) had plunged sharply after a strong run-up in these stocks on anticipation of reforms hope before the budget.

Defence-related counters – Bharat Electronics and NELCO – surged 2% each at Rs 1,824 and Rs 59.35 respectively, while Larsen and Toubro (L&T) is trading flat at Rs 1,487.

Though the FDI liberalisation in the sector would help in modernisation and expansion of the railway projects, on-ground execution and private participation are vital for a change in railways’ fortunes, analysts suggest.

“While the government has indeed announced a plan to increase investment, considering the record of the past few years, we believe that execution is key. Particularly, the plan for increased investment through PPP (private public partnerships) has in the past been met with lukewarm response from private investors,” said Chetan Ahya and Upasana Chachra of Morgan Stanley in their note post the Rail Budget.

Patnaik of Religare expects rail stocks to do well going ahead. If one wants to play this as a theme, he recommends container related stocks like CONCOR and Gateway Distriparks.

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