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In the Indian stock market, Public Sector Undertakings (PSU Stocks) related to Capital Goods, Defense and Railway Infrastructure have given extraordinary returns to investors in the last few years. These government companies are directly benefiting from the increasing CAPEX of the Central Government on indigenization of defense equipment and modernization of Indian Railways under the ‘Make in India’ and ‘Atmanirbhar Bharat’ campaigns. Meanwhile, leading brokerage firms have shared their bullish view on a leading Navratna PSU engineering company whose core business is deeply linked to both defense and railways strategic sectors. Market analysts estimate that on the basis of strong order book and execution ability, this PSU stock can give excellent upside returns of up to 29 percent from the current levels.
Defense and Railways: Company’s business is gaining momentum with dual engines
The biggest Unique Selling Proposition (USP) of this government engineering company is its diversified business model. The company is not dependent on just one sector, but plays a leading role in two of the fastest growing infrastructure sectors in the country:
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Defense and Aerospace Vertical: The company manufactures Heavy Armored Recovery Vehicles, High-Mobility Trucks, Missile Launch Vehicles, Bridge Layer Systems and military equipment for the Indian Army, Air Force and Navy. Due to the ban on imports by the Defense Ministry and giving priority to indigenous procurement, new contracts are continuously being added to the company’s defense segment.
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Railway and Metro Infrastructure Vertical: The company has a strong stake in the design and manufacturing of rolling stock, Vande Bharat sleeper train sets, metro coaches and high-speed rail components for Indian Railways. The company is continuously emerging as a strong bidder in the tenders for expansion of metro network and modern coach manufacturing of railways in various cities across the country.
Brokerage’s main arguments behind upside target of up to 29%
While maintaining the BUY rating on the company’s shares, leading brokerage firms have predicted an increase of about 29 percent in its target price. According to brokerage reports, this positive outlook is based on the following fundamental factors:
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Strong Unexecuted Order Book: The company has a strong order book comprising of three key segments – Defence, Railways and Mining, which provides stable revenue visibility for the coming three to four years.
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Improving Margins and Profitability: Due to increase in the share of high margin defense equipment and modern metro/train sets in the company’s product mix, its operating profit margin (EBITDA Margin) is continuously improving.
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Vande Bharat and new opportunities for export: Along with the successful prototype execution of Vande Bharat Sleeper Projects in the domestic market, the company is also exploring the export of defense and rail components to the markets of South-East Asia and the Middle East.
Order book execution and modern manufacturing capacity
Market analysts believe that having a large order book is not enough, but executing it on time is most important. The company has significantly accelerated the delivery cycle by installing automation, robotics and modern assembly lines in its manufacturing plants. Additionally, developing a strong supply chain with private vendor networks and MSME partners has reduced component costs and made the working capital cycle more efficient.
Technical Charts and Stock Momentum Analysis
From the point of view of technical analysis, this PSU stock has come out of its recent consolidation phase and is moving in the direction of uptrend.
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Moving Averages: The stock is trading above the strong support levels of its 50-day and 200-day Simple Moving Average (SMA).
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Momentum Indicators: The Relative Strength Index (RSI) and On-Balance Volume (OBV) charts are indicating gradual accumulation of shares by institutional investors (DIIs and FPIs) on every dip.
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Volume breakout: A significant increase in trading volumes is being recorded following the latest order announcements and quarterly results, which confirms the strong dominance of buyers in the market.
Strategy and risk management advice for investors
Although the medium to long term outlook for both the defense and railways sectors is positive, it is important to keep in mind certain risks while investing in PSU stocks. Unexpected delays in allotment of government tenders, fluctuations in prices of raw materials (steel and aluminium) and changes in government policies may impact the short-term performance of companies. If you are looking to build a position in this stock for a potential target of 29%, then instead of making huge lump sum investments, adopt a buy on dips strategy, strictly follow the stop-loss and keep your portfolio balanced.