Transportation has been a lifeline for countries across the world. In a recent report, IDBI Capital pointed out that Railway capex which is primarily undertaken by Indian Railways (IR) has doubled in the last 5 years to Rs 1.4 lakh crore in FY20. Though near term due to pandemic there are concerns on the sustainability of the trend but this too shall pass, it said.

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Further, IDBI noted that the opportunity for EPC (engineering, procurement, construction) players which was 35 percent of the annual Indian Railway capex in FY10 has increased to 45 percent in FY20.

Three stocks from the rail sector that has been listed - RITES, Rail Vikal Nigam, and IRCON, all have a strong pedigree of execution of rail word and order book and hence the brokerage initiated coverage on all three stocks.

Though weak Q1FY21 will have an impact on FY21E revenue, it expects execution to improve in FY22E for all the three companies. It added that they also have a high cash balance sheet at 18-25 percent of their market cap and pays a consistent dividend of about 30-65 percent which is another positive for them.

It also noted that stock valuation provides comfort and exposure to government orders augur well cash-flow in the current environment. In the base case, the target has an upside 19 percent for RITES, 26 percent for RVNL, and 10 percent for IRCON. In the bull case scenarios, the target price has an upside of 39 percent, 69 percent, and 31 percent respectively.

For FY21E, Indian Railways has set a capex target of Rs 1.6 lakh crore. This is expected to be funded from a government grant, internal resources and remaining from Extra Budgetary Resources (EBR).

Going ahead, IDBI believes that the Ministry of Railways' stance of complete electrification of the rail line, increase in the speed of train and supply deficit, would further strengthen the EPC opportunity.