17/07/2024
5 Budget Stocks Set to Rally: Time to Buy Before Budget?
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Introduction to the Investment Landscape
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In this blog, we will cover five stocks from five different sectors that have massive potential due to significant government investments. The Indian government has identified six critical sectors in the interim budget, and these sectors are expected to remain in focus for the next few years. These sectors include railways, housing, health, energy, environment, and agriculture. Understanding the fundamentals, technicals, valuation, and risks of these stocks can help make informed investment decisions.
Railways: Rail Vikas Nigam Limited (RVNL)
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RVNL has shown impressive performance in the past year, driven by significant order inflows. In the last month alone, the stock has given close to 60% returns, and over the past year, it has surged by 404%. Here are the key points to consider:
* Order inflows from central and state railways
* Diversification into international projects
* Revenue visibility due to a strong order book
* Management's growth targets
RVNL's diversification strategy involves picking up projects from countries like Bangladesh, Maldives, Sri Lanka, UAE, and Oman. This reduces dependency on Indian railways and expands its revenue base.
# # # Business Models
RVNL operates on two business models:
* Nomination basis: Indian railways nominate RVNL for projects
* Bidding: RVNL proactively bids for railway infrastructure projects
Interestingly, the margins are higher when RVNL bids for projects compared to nominations from Indian railways.
# # # Future Potential
RVNL is poised to benefit from the three high-speed railway corridors announced in the interim budget. Although the tenders have not been issued yet, RVNL is ready to capitalize on these opportunities.
# # # Valuation
RVNL is trading at a PE of 90, which is significantly higher than the industry average. This makes it a risky investment as the stock may correct due to profit booking. A cautious approach is recommended when investing in such high-rally stocks.
Housing: Housing and Urban Development Corporation (HUDCO)
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HUDCO has seen a massive rally of around 446% in the last year. This PSU NBFC focuses on both urban infrastructure and affordable housing loans. Key points to note:
* Significant growth in loan sanctions and disbursements
* Diversified loan book with a focus on urban infrastructure
* Low NPAs and cost of borrowing
In FY24, HUDCO sanctioned more than 3.5 times the loans compared to FY23. Their loan book is divided into urban infrastructure and affordable housing, with a significant portion focused on urban infrastructure projects.
# # # Growth Drivers
The growth in HUDCO's loan book is driven by urban infrastructure projects such as roads, industrial corridors, metro projects, and government buildings. The company's focus on urban infrastructure is a key differentiator.
# # # NPAs and Cost of Borrowing
HUDCO's NPAs have been decreasing, which is a positive sign. Additionally, the cost of borrowing is coming down, further enhancing profitability. The company raises funds through tax-free bonds, taxable bonds, and bank borrowings at competitive rates.
# # # Valuation
HUDCO trades at a higher PE compared to the industry average, reflecting the premium it enjoys due to its strong fundamentals and growth prospects.
Energy and Environment: Praj Industries
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Praj Industries operates in the energy and environment sectors, both of which are receiving significant government attention. The stock has given a 40% rally in the last month, driven by the focus on sugar stocks and ethanol production.
# # # Key Points
* Operating in 100+ countries
* Holding 400+ patents
* Net debt-free company
* Strong financial performance
Praj Industries is a bioenergy company with a significant presence in ethanol production. The company also focuses on high purity water for pharmaceutical applications and engineering services for bioenergy-related plants.
# # # Future Potential
The government plans to set up 5,000 biogas plants with an investment of around 2 lakh crores in the next five years. Additionally, a new scheme to provide environment-friendly alternatives like biodegradable polymers and bioplastics is expected to benefit Praj Industries.
# # # Risks
Despite the growth potential, Praj Industries faces risks related to the cyclic nature of sugar and ethanol production. The company's revenue in FY24 was impacted by government restrictions on sugar use for ethanol production.
# # # Valuation
Praj Industries is trading at a PE of 49, slightly above the industry average. The company's strong fundamentals justify the premium valuation.
Conclusion
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Investing in stocks with massive potential requires a thorough understanding of their fundamentals, technicals, valuation, and risks. RVNL, HUDCO, and Praj Industries are three stocks that have shown impressive performance and have strong growth prospects due to government investments in their respective sectors. However, it is essential to approach these investments cautiously and consider diversifying the investment to manage risks effectively.
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