As the fourth largest railway network worldwide, Indian Railways operates more than 22,593 trains daily, serving 24 million passengers and transporting 204 million tonnes of freight across its 68,103 km route and 7,337 stations.
The sector is expected to see substantial growth, with India projected to become the fifth largest outbound market by 2027, necessitating an increase in the daily number of trains.
The railway explosion
In response to the expected boom, Indian Railways intended a massive ₹1 trillion investment for new train acquisitions over the coming years to accommodate the projected annual passenger count of 7 billion, which is likely to rise to 10 billion by 2030.
This massive plan involves acquiring 7,000-8,000 new trainsets over the next 15 years, aiming to strengthen passenger and domestic goods transport capabilities and create a future-proof railway system. The government’s significant investment in the sector aims to upgrade infrastructure for higher efficiency and reliability.
The rail minister’s upgrade initiative focuses on meeting evolving transport needs and addressing long-term waiting lists. The aim is to boost the modal share of the railway in freight from the current 26-27% to 40-45%, aligning with global commitments to reduce emission levels. The government’s efforts include electrifying 90% of the rail network, with full electrification expected by early 2024, leading to the phasing out of diesel locomotive-hauled trains.
Future plans include commissioning new Dedicated Freight Corridors, high-speed Passenger Corridors, and undertaking multi-tracking and signaling upgrades on congested routes. The next decade will see large capital expenditures in the rail sector, outstripping demand by 2030.
The railway explosion
Indian Railways has earmarked a massive investment of ₹1 trillion to acquire new trains over the next few years to serve the projected 7 billion passengers annually, with a projected increase to 10 billion by 2030.
The plan involves acquiring 7,000-8,000 new trainsets over the next 15 years, aligning with wider efforts to improve passenger and domestic goods transport capabilities.
The aim is also to create a future railway system that meets passenger demand but also boosts the modal share of railways in freight from the current 26-27% to 40-45%.
The government’s pivotal role in fostering this growth is evident through large investments in the sector, focusing on upgrading the country’s railway infrastructure to achieve higher efficiency and reliability.
The rail minister’s upgrade initiative focuses on meeting evolving transport needs and addressing long-term waiting lists. The aim is to boost the modal share of the railway in freight from the current 26-27% to 40-45%, aligning with global commitments to reduce emission levels. The government’s efforts include electrifying 90% of the rail network, with full electrification expected by early 2024, leading to the phasing out of diesel locomotive-hauled trains.
Future plans include commissioning new Dedicated Freight Corridors, high-speed Passenger Corridors, and undertaking multi-tracking and signaling upgrades on congested routes. The next decade will see large capital expenditures in the rail sector, outstripping demand by 2030.
Concord Control Systems: A ticket to the booming Indian railway sector
Concord Control, listed in 2022, manufactures and supplies coaches and electrification products for Indian Railways and other railway contractors.
It is an approved vendor of the Research Design and Standards Organization (“RDSO”), enabling it to manufacture and supply critical products for the Indian Railways.
The company produces a key component used in the railways known as the inter-vehicle connector, which is used to make electrical connections between two coaches.
Apart from this, it also manufactures products required in railway coaches such as emergency lighting systems, brushless dc carriage fans, exhaust fans, cable jackets, bellows etc, and products required in the electrification of coaches and the broad gauge network of Indian railways.
Concord Control began operations in 2011, gaining approval to manufacture and supply battery chargers for railway electrified traction systems. Later, it expanded into critical emergency lighting units and other products.
While the Indian Railways dominates a large portion of the company’s revenue, Concord Control Systems has also diversified its customer base.
It supplies rail components to marquee players in the industry, such as KEC International, Larsen & Toubro, Kalpataru Power Transmission, Rail Vikas Nigam, Fedders Lloyd Corporation, and Tata Projects.
Business Activity: Growing on a Strong Base
Between 2019 and 2023, the business performed admirably. Sales and net profit reported a three-year CAGR of 46% and 73% respectively.
The returns were strong, with the Return on Equity and Return on Capital Employed averaging 34% and 36% over a 3-year period.
As the company listed in 2022, the increase in shareholder equity adjusted its debt to equity down from 0.65 in 2019 to 0.13 in 2023. And now, the company boasts a healthy balance sheet, paving the way for future growth.
While the company holds clear approval from the Indian Railways, it is not immune to competition. It is competing with a number of players, however none of them are listed so far.
Despite the competitive landscape, the company has a leg up, given its years of experience dealing with the Indian Railways and the first mover advantage.
The company is constantly investing in new technology, growing organically or inorganically. It aims to collaborate with new players and work on more products for the Indian Railways.
Recently, it acquired a 26% stake in Progata India to develop the prototype control and relay panels. It has also forged an alliance with an IISc start-up for railways – L2MRail – in the form of a joint venture to strengthen the safety of Indian railways.
While business growth has been healthy, the elevated debt levels can be a cause for concern. Generally, extended accounts payable days mean that the company waits longer to collect payments from its customers.
This delay in fundraising can lead to liquidity problems, affecting the company’s ability to meet its short-term financial obligations, pay suppliers or invest in growth opportunities.
Since Concord Control Systems deals with public sector enterprises, (in this case Indian Railways), this is a common phenomenon. So, there is a good chance that the company will continue to experience prolonged payment cycles.
However, the IPO addressed this issue for the company in the short term, capitalizing its balance sheet well enough to handle any working capital pressures.
In 2022, Concord raised capital (IPO in 2022) with a primary need to expand its working capital needs.
Share Price Performance
In the past six months, the share price has risen sharply, tripling in value from ₹276 in July 2023 to ₹875 currently.
The stock rose after the strong half-year results reported by the company. While sales are up 16%, net profit has doubled compared to the same period last year.
The company’s October 2023 shareholder added to the positive momentum. The filing revealed that Mukul Agarwal, a prominent investor in India known for his microcap stocks and stock options, invested in the company.
Mukul Agrawal currently holds 240,000 shares of the company, amounting to approximately 4.01% of the company’s total paid-up capital.
Currently, the stock trades at a price to earnings ratio of 54 times, a premium to its 1-year average PE and the industry PE.
Conclusion
Concord Control Systems, perhaps a hidden gem in the railway ancillary sector, is well positioned to reap significant benefits from the booming expansion of India’s railway network.
The company’s strong finances and diverse clientele with a focus on supplying critical components, present an optimistic outlook.
However, the recent increase in the share price indicates that investors may have already factored in the bright outlook, possibly limiting the improvement in the share price in the short term.
However, for investors with a long-term perspective, Concord Control Systems could make an interesting prospect in the booming rail sector.
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
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Published: 15 Jan 2024, 13:00 IST
(tagsTo Translate) Concord Control Systems stock price