Will power, defence, and railway stocks continue to attract investor interest after sharp rally?

PSU stocks in the Indian stock market have emerged as significant wealth generators, with some recording impressive returns of up to 800% in less than a year, largely driven by increased capital expenditure (capex) and government-led initiatives favoring PSU companies.

Additionally, robust order acquisitions from the private sector, combined with limited liquidity in these stocks due to substantial government holdings, have created a supply-demand imbalance, pushing stock prices even higher.

The recent election victory of the BJP, forming the government (coalition government) at the center for the third time, has further fueled the rally in the PSU stocks on the anticipation of political stability and policy continuity.

Also Read: Will PSUs lose their thunder in Modi 3.0?

Defence, power, and railways stocks have particularly stood out as top wealth creators among the PSU basket, with many stocks in these sectors significantly outperforming the broader BSE PSU index.

Despite the considerable rally witnessed in these stocks, analysts maintain a bullish outlook, citing compelling factors that suggest these sectors are poised for significant transformation.

Domestic brokerage firm Antique Stock Broking, in its latest report, said, "Despite massive re-rating, power, defence and railways will continue to attract investors’ interest due to the decadal opportunity. Power shortages, the thrust of new technologies in the T&D segment and renewables, defence exports, and indigenization, and the growing shift to the private sector in the railway supply chain are key drivers."

Also Read: SBI, Coal India, GAIL among 5 preferred PSU stock picks by MOFSL

The brokerage has outlined the following key drivers for each sector in its report and has also raised target prices for select stocks.

Defence: Indigenisation to spur opportunities

According to Antique Stock Broking, the Indian defence sector has undergone significant transformations over the past four years, driven by revolutionary steps taken by the government to establish a robust domestic defence ecosystem. It said that the Ministry of Defence (MoD) is focused on fostering this ecosystem through several initiatives.

These include implementing a positive indigenisation list for over 400 defence items to boost domestic production, increasing the FDI limit from 49% to 74%, and encouraging foreign OEMs to set up manufacturing and maintenance entities through subsidiaries in India.

Also Read: Nifty 50 target raised to 25,683; HDFC Bank, SBI among 19 conviction stock picks

Additionally, the MoD has introduced a new category of buying (global manufacturing in India), requiring foreign OEMs to manufacture or maintain parts of the equipment in India.

The Indigenous content requirement has been increased by 10%, now mandating 50% local content compared to 40% in DPP 2016. Furthermore, certain categories have been reserved exclusively for Indian vendors to protect domestic manufacturers, including Buy (Indian-IDDM), Make I, Make II, and other strategic partnership models, the brokerage stated.

Also Read: Defence stocks surge up to 20% with Paras Defence, HAL, Mazagon Dock hitting new peaks

The Government of India (GoI) has planned a capital outlay of ₹8.3 trillion over the next few years for equipment to be procured from domestic defence players.

In anticipation of robust growth, the brokerage revised its target prices for defence stocks: BEL's target price raised to ₹339 from ₹308, maintaining a ‘buy’ rating; HAL's target price increased to ₹6,145 from ₹5,462, also with a ‘buy’ rating.

Mazagon Dock Shipbuilders has a ‘buy’ rating with the target price adjusted to ₹3,458 from ₹2,833. BEML saw an upgrade to a ‘buy’ rating, with the target price raised to ₹5,216 from ₹3,510.

Also Read: How India's defence sector is going all guns blazing

Power: Surge in capex all round

There has been a strong surge in power capex, which is gaining momentum across both power generation and transmission & distribution segments. Significant investments are earmarked for thermal and renewable energy projects in power generation.

Power consumption grew by 8%–10% in FY22–24, raising concerns about potential peak power shortages in India. To address this, the government plans to add 80 GW of thermal capacity by 2032, said the brokerage.

Also Read: Adani Group plans $3-billion push for new clean-energy business

It said, 30 GW are under construction at present, and an additional 44–45 GW of projects are expected to be awarded by FY27 for completion by 2032, leading to annual tendering of over 10 GW in the next three years.

The brokerage also pointed out India's ambitious plans to achieve 500 GW of installed capacity by FY32, up from the current 200 GW, highlighting the need for a robust transmission network to ensure smooth power evacuation to load centers.

It noted that the transmission system is planned for about 537 GW of renewable energy capacity, necessitating a substantial ₹4.8 trillion capex over FY23–27. This significant investment is expected to drive demand for T&D equipment, with ₹3.1 trillion allocated to inter-state transmission and ₹1.7 trillion to intra-state transmission.

Also Read: Suzlon Energy stock climbs 5% to attain level last seen in April 2011

The brokerage highlighted that such growth prospects are likely to attract increased private sector investment, with projects increasingly being bid under the tariff-based competitive bidding (TBCB) method, potentially mobilizing ₹1.7–2 trillion of private player investments over the next five years.

It maintained its target price of ₹361 with a 'buy' rating for BHEL in the PSU sector. However, it revised the target prices upwards for other stocks, increasing Kirloskar Pneumatic's target price to ₹1,722 from ₹1,073 per share, and for Kirloskar Oil Engines, it raised the target price to ₹1,591 from ₹1,345 per share.

In addition, L&T's target price was adjusted to ₹4,204 per share from ₹3,933, and Hitachi Energy's target price was increased to ₹14,164 from ₹11,803. Siemens' target price was set at ₹8,738 from ₹7,573, and Transformers and Rectifiers' target price was raised marginally to ₹861 from ₹847 per share.

Notably, for Honeywell Automation, the rating was upgraded to 'buy' with a revised target price of ₹62,362 per share, up from ₹52,538.

Conversely, the brokerage maintained a 'hold' rating on LMW and Thermax but raised its target price to ₹18,023 from ₹14,643 per share for the former and for the latter the target price was lifted to ₹5,327.

Railways: On fast track

According to the brokerage, the railway capex is gathering momentum with significant opportunities in rolling stocks, line construction, and railway station development. It said the National Rail Plan aims to spend ₹9.2 trillion during FY26E–31E, up from ₹5.8 trillion during FY21–26E.

Major business opportunities arise on both the passenger and freight sides, including the procurement of Vande Bharat trains, metro capex, and initiatives to increase freight market share from 27% to 45% by 2030.

Also Read: Turnaround stocks of 2024: Top 5 shares that are potential multibaggers

The brokerage noted that India's metro rail projects present a massive investment pipeline of ₹3 trillion. The metro network has expanded significantly, with 803 km operational in 15 cities and 445 km under implementation.

An additional 1,475 km of projects are in the planning and approval stages, projected to entail ₹3 trillion in investment over the next five years. This growth benefits companies like Titagarh, which has developed capabilities in manufacturing coaches, propulsion units, and bogies.

With the Dedicated Freight Corridor (DFC) taking shape, railway freight is expected to scale up, increasing annual freight carriage from 1,400 MT to 3,000 MT by 2027. This growth will expand the wagon fleet from 336,900 to 500,000 by 2027, with a consistent ordering of 21,000 wagons per year.

Also Read: IRFC, GAIL, Olectra Greentech, among 7 super picks BP Wealth listed for June

It pointed out that the private sector is expected to contribute 3,000–5,000 wagons annually. Potential investments of ₹856 billion over the next decade and another ₹2,130 billion by 2051 will provide substantial potential for higher private participation in wagon ownership.

About 35% of the existing wagon fleet is older than 15 years, creating opportunities for wagon manufacturers as these are replaced, it added.

In the PSU sector, the brokerage raised the target price for IRCON to ₹382 per share from ₹281, and similarly increased the target price for Rites to ₹855 per share from ₹787. Both stocks have a 'buy' rating.

Moving to the private sector, the brokerage also raised the target price for Titagarh Rail Systems to ₹1,669 from ₹1,489, affirming a 'buy' rating. For Jupiter Wagons, the brokerage maintained a 'hold' rating but increased the target price to ₹588 per share from ₹409.

Also Read: Railways to float ₹5,000 crore tender for Kavach safety system

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.